Is Digilife Technologies (SGX:BAI) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Digilife Technologies Limited (SGX:BAI) does use debt in its business. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Digilife Technologies

How Much Debt Does Digilife Technologies Carry?

The image below, which you can click on for greater detail, shows that Digilife Technologies had debt of S$2.21m at the end of December 2020, a reduction from S$2.49m over a year. But it also has S$11.8m in cash to offset that, meaning it has S$9.60m net cash.

How Healthy Is Digilife Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Digilife Technologies had liabilities of S$15.3m due within 12 months and liabilities of S$3.43m due beyond that. Offsetting these obligations, it had cash of S$11.8m as well as receivables valued at S$12.8m due within 12 months. So it actually has S$5.89m more liquid assets than total liabilities.

This surplus suggests that Digilife Technologies is using debt in a way that is appears to be both safe and conservative. 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 Digilife Technologies 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 Digilife Technologies'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.

Over 12 months, Digilife Technologies made a loss at the EBIT level, and saw its revenue drop to S$264m, which is a fall of 9.2%. That's not what we would hope to see.

So How Risky Is Digilife Technologies?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Digilife Technologies had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through S$3.5m of cash and made a loss of S$2.8m. Given it only has net cash of S$9.60m, 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Digilife Technologies (of which 1 doesn't sit too well with us!) you should know about.

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.

If you’re looking to trade Digilife Technologies, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.