Divfex Berhad (KLSE:DFX) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Divfex Berhad (KLSE:DFX) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Divfex Berhad

How Much Debt Does Divfex Berhad Carry?

The image below, which you can click on for greater detail, shows that at September 2022 Divfex Berhad had debt of RM7.86m, up from RM3.46m in one year. But on the other hand it also has RM25.4m in cash, leading to a RM17.5m net cash position.

How Strong Is Divfex Berhad's Balance Sheet?

We can see from the most recent balance sheet that Divfex Berhad had liabilities of RM19.0m falling due within a year, and liabilities of RM3.49m due beyond that. Offsetting this, it had RM25.4m in cash and RM10.5m in receivables that were due within 12 months. So it can boast RM13.4m more liquid assets than total liabilities.

It's good to see that Divfex Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Divfex Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Divfex Berhad made a loss at the EBIT level, last year, it was also good to see that it generated RM4.0m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Divfex Berhad will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Divfex Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Divfex Berhad actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Divfex Berhad has net cash of RM17.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of RM7.6m, being 194% of its EBIT. So we don't think Divfex Berhad's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Divfex Berhad (1 is a bit unpleasant!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.