Is Digistar Corporation Berhad (KLSE:DIGISTA) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Digistar Corporation Berhad (KLSE:DIGISTA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Digistar Corporation Berhad

What Is Digistar Corporation Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Digistar Corporation Berhad had RM249.9m of debt in December 2021, down from RM265.6m, one year before. However, because it has a cash reserve of RM32.8m, its net debt is less, at about RM217.1m.

How Strong Is Digistar Corporation Berhad's Balance Sheet?

According to the last reported balance sheet, Digistar Corporation Berhad had liabilities of RM47.2m due within 12 months, and liabilities of RM233.0m due beyond 12 months. Offsetting these obligations, it had cash of RM32.8m as well as receivables valued at RM21.5m due within 12 months. So its liabilities total RM225.9m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the RM46.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Digistar Corporation Berhad would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. 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 20%, to RM19m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Digistar Corporation Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM11m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. 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 we think this stock is quite risky. We'd prefer to pass. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Digistar Corporation Berhad has 5 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.

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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.