Does Divfex Berhad (KLSE:DGSB) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Divfex Berhad (KLSE:DGSB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Divfex Berhad

What Is Divfex Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Divfex Berhad had RM8.95m of debt in June 2022, down from RM11.2m, one year before. But on the other hand it also has RM26.5m in cash, leading to a RM17.6m 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 RM21.4m falling due within a year, and liabilities of RM4.19m due beyond that. Offsetting these obligations, it had cash of RM26.5m as well as receivables valued at RM14.2m due within 12 months. So it actually has RM15.1m more liquid assets than total liabilities.

This surplus strongly suggests that Divfex Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Divfex Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Divfex Berhad improved its EBIT from a last year's loss to a positive RM2.2m. There's no doubt that we learn most about debt from the balance sheet. 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. While Divfex Berhad has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Divfex Berhad produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Divfex Berhad has RM17.6m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 78% of that EBIT to free cash flow, bringing in RM1.7m. So is Divfex Berhad's debt a risk? It doesn't seem so to us. 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 Divfex Berhad that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.