Is Datasonic Group Berhad (KLSE:DSONIC) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Datasonic Group Berhad (KLSE:DSONIC) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Datasonic Group Berhad

How Much Debt Does Datasonic Group Berhad Carry?

As you can see below, Datasonic Group Berhad had RM45.5m of debt at September 2024, down from RM64.7m a year prior. But on the other hand it also has RM133.5m in cash, leading to a RM88.0m net cash position.

How Healthy Is Datasonic Group Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Datasonic Group Berhad had liabilities of RM75.0m due within 12 months and liabilities of RM16.6m due beyond that. Offsetting this, it had RM133.5m in cash and RM140.2m in receivables that were due within 12 months. So it actually has RM182.1m more liquid assets than total liabilities.

It's good to see that Datasonic Group Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Datasonic Group Berhad has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Datasonic Group Berhad grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Datasonic Group Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Datasonic Group 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 three years, Datasonic Group Berhad produced sturdy free cash flow equating to 70% 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 we empathize with investors who find debt concerning, you should keep in mind that Datasonic Group Berhad has net cash of RM88.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 23% year-on-year EBIT growth. So is Datasonic Group Berhad's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Datasonic Group Berhad that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.