Health Check: How Prudently Does Digistar Corporation Berhad (KLSE:DIGISTA) Use Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Digistar Corporation Berhad (KLSE:DIGISTA) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Digistar Corporation Berhad

How Much Debt Does Digistar Corporation Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that Digistar Corporation Berhad had RM245.1m of debt in March 2022, down from RM265.9m, one year before. However, because it has a cash reserve of RM29.9m, its net debt is less, at about RM215.2m.

A Look At Digistar Corporation Berhad's Liabilities

We can see from the most recent balance sheet that Digistar Corporation Berhad had liabilities of RM42.2m falling due within a year, and liabilities of RM233.0m due beyond that. Offsetting this, it had RM29.9m in cash and RM21.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM224.0m.

This deficit casts a shadow over the RM38.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Digistar Corporation Berhad would probably need a major re-capitalization if its creditors were to demand repayment. 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.

In the last year Digistar Corporation Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 659%, to RM21m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Despite the top line growth, Digistar Corporation Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM11m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of RM2.8m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. 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. For example Digistar Corporation Berhad has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.