Does Diversified Gateway Solutions Berhad (KLSE:DGSB) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Diversified Gateway Solutions Berhad (KLSE:DGSB) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Diversified Gateway Solutions Berhad

How Much Debt Does Diversified Gateway Solutions Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Diversified Gateway Solutions Berhad had RM11.2m of debt, an increase on RM8.01m, over one year. However, it does have RM19.3m in cash offsetting this, leading to net cash of RM8.08m.

How Strong Is Diversified Gateway Solutions Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Diversified Gateway Solutions Berhad had liabilities of RM16.6m due within 12 months and liabilities of RM277.6k due beyond that. On the other hand, it had cash of RM19.3m and RM6.80m worth of receivables due within a year. So it can boast RM9.20m more liquid assets than total liabilities.

This surplus suggests that Diversified Gateway Solutions Berhad has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Diversified Gateway Solutions Berhad has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Diversified Gateway Solutions 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.

In the last year Diversified Gateway Solutions Berhad had a loss before interest and tax, and actually shrunk its revenue by 3.0%, to RM14m. We would much prefer see growth.

So How Risky Is Diversified Gateway Solutions Berhad?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Diversified Gateway Solutions Berhad lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through RM9.5m of cash and made a loss of RM19m. Given it only has net cash of RM8.08m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Diversified Gateway Solutions Berhad (1 is a bit concerning!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.

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