Digistar Corporation Berhad (KLSE:DIGISTA) Has A Somewhat Strained Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Digistar Corporation Berhad (KLSE:DIGISTA) does use debt in its business. But the real question is whether this debt is making the company risky.

We've discovered 4 warning signs about Digistar Corporation Berhad. View them for free.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Digistar Corporation Berhad Carry?

The image below, which you can click on for greater detail, shows that Digistar Corporation Berhad had debt of RM201.9m at the end of December 2024, a reduction from RM217.0m over a year. However, it does have RM56.9m in cash offsetting this, leading to net debt of about RM145.0m.

How Strong Is Digistar Corporation Berhad's Balance Sheet?

We can see from the most recent balance sheet that Digistar Corporation Berhad had liabilities of RM56.0m falling due within a year, and liabilities of RM183.8m due beyond that. On the other hand, it had cash of RM56.9m and RM28.8m worth of receivables due within a year. So it has liabilities totalling RM154.1m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the RM28.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Digistar Corporation Berhad would likely require a major re-capitalisation if it had to pay its creditors today.

View our latest analysis for Digistar Corporation Berhad

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.56 times and a disturbingly high net debt to EBITDA ratio of 17.2 hit our confidence in Digistar Corporation Berhad like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Worse, Digistar Corporation Berhad's EBIT was down 52% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. There's no doubt that we learn most about debt from the balance sheet. But it is Digistar Corporation Berhad's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, Digistar Corporation Berhad actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

To be frank both Digistar Corporation Berhad's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. After considering the datapoints discussed, we think Digistar Corporation Berhad has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Digistar Corporation Berhad , and understanding them should be part of your investment process.

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.