Is DGB Asia Berhad (KLSE:DGB) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that DGB Asia Berhad (KLSE:DGB) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for DGB Asia Berhad

How Much Debt Does DGB Asia Berhad Carry?

As you can see below, at the end of September 2024, DGB Asia Berhad had RM9.41m of debt, up from RM3.21m a year ago. Click the image for more detail. However, its balance sheet shows it holds RM31.9m in cash, so it actually has RM22.5m net cash.

How Healthy Is DGB Asia Berhad's Balance Sheet?

According to the last reported balance sheet, DGB Asia Berhad had liabilities of RM28.8m due within 12 months, and liabilities of RM99.7m due beyond 12 months. On the other hand, it had cash of RM31.9m and RM54.7m worth of receivables due within a year. So its liabilities total RM41.9m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the RM20.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, DGB Asia Berhad would likely require a major re-capitalisation if it had to pay its creditors today. Given that DGB Asia Berhad has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since DGB Asia 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.

Over 12 months, DGB Asia Berhad made a loss at the EBIT level, and saw its revenue drop to RM57m, which is a fall of 4.3%. That's not what we would hope to see.

So How Risky Is DGB Asia Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year DGB Asia Berhad had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through RM278k of cash and made a loss of RM17m. But the saving grace is the RM22.5m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 4 warning signs for DGB Asia Berhad (2 are a bit unpleasant) you should be aware of.

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.