Does Datapulse Technology (SGX:BKW) Have A Healthy 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 Datapulse Technology Limited (SGX:BKW) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Datapulse Technology

What Is Datapulse Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Datapulse Technology had S$22.3m of debt in July 2020, down from S$23.4m, one year before. But it also has S$38.8m in cash to offset that, meaning it has S$16.4m net cash.

How Strong Is Datapulse Technology's Balance Sheet?

According to the last reported balance sheet, Datapulse Technology had liabilities of S$4.10m due within 12 months, and liabilities of S$20.7m due beyond 12 months. On the other hand, it had cash of S$38.8m and S$361.0k worth of receivables due within a year. So it actually has S$14.3m more liquid assets than total liabilities.

This luscious liquidity implies that Datapulse Technology's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Datapulse Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Datapulse Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Datapulse Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 25%, to S$2.7m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Datapulse Technology?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Datapulse Technology had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through S$1.4m of cash and made a loss of S$5.8m. Given it only has net cash of S$16.4m, the company may need to raise more capital if it doesn't reach break-even soon. Datapulse Technology's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Datapulse Technology , and understanding them should be part of your investment process.

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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