Health Check: How Prudently Does Datapulse Technology (SGX:BKW) Use Debt?

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.' 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 Datapulse Technology Limited (SGX:BKW) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Datapulse Technology

What Is Datapulse Technology's Debt?

The chart below, which you can click on for greater detail, shows that Datapulse Technology had S$21.3m in debt in January 2021; about the same as the year before. However, it does have S$32.9m in cash offsetting this, leading to net cash of S$11.6m.

How Healthy Is Datapulse Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Datapulse Technology had liabilities of S$1.97m due within 12 months and liabilities of S$21.3m due beyond that. Offsetting these obligations, it had cash of S$32.9m as well as receivables valued at S$648.0k due within 12 months. So it can boast S$10.3m more liquid assets than total liabilities.

This excess liquidity suggests that Datapulse Technology is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Datapulse Technology has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Datapulse Technology's earnings that will influence how the balance sheet holds up in the future. 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 had a loss before interest and tax, and actually shrunk its revenue by 85%, to S$680k. That makes us nervous, to say the least.

So How Risky Is Datapulse Technology?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Datapulse Technology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through S$4.2m of cash and made a loss of S$7.1m. Given it only has net cash of S$11.6m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Datapulse Technology (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

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.

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This article by Simply Wall St is general in nature. 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.
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