Health Check: How Carefully Does Digistar Corporation Berhad (KLSE: DIGISTA) Use Debt?

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Digistar Corporation Berhad (KLSE:DIGISTA) uses debt. But does this debt worry shareholders?

What risk does debt carry?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business 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.

Check out our latest analysis for Digistar Corporation Berhad

What is the debt of Digistar Corporation Berhad?

You can click on the graph below for historical figures, but it shows that Digistar Corporation Berhad had RM245.1 million in debt in March 2022, up from RM265.9 million a year earlier. However, as he has a cash reserve of RM29.9 million, his net debt is less at around RM215.2 million.

KLSE: DIGISTA Debt to Equity History July 29, 2022

A look at the responsibilities of Digistar Corporation Berhad

We can see from the most recent balance sheet that Digistar Corporation Berhad had liabilities of RM42.2 million due within one year, and liabilities of RM233.0 million due beyond. In return, he had RM29.9 million in cash and RM21.3 million in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and receivables (short term) of RM224.0 million.

This deficit casts a shadow over the RM38.2m company, like a towering colossus of mere mortals. We would therefore be watching his balance sheet closely, no doubt. Ultimately, Digistar Corporation Berhad would likely need a major recapitalization if its creditors were to demand repayment. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of Digistar Corporation Berhad that will influence the balance sheet in the future. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.

Last year, Digistar Corporation Berhad was not profitable in terms of EBIT, but managed to increase its revenue by 659% to RM21 million. That’s practically the hole-in-one of revenue growth!

Caveat Emptor

Despite the growth in revenue, Digistar Corporation Berhad still posted a loss in earnings before interest and taxes (EBIT) over the past year. Indeed, it lost a very considerable RM11 million in EBIT. Combining this information with the significant liabilities we have already discussed makes us very hesitant about this stock, to say the least. Of course, he may be able to improve his situation with a bit of luck and good execution. But we think that’s unlikely as it lacks liquid assets and posted a loss of RM2.8m last year. So while it’s not wise to assume the business will fail, we think it’s risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, Digistar Corporation Berhad has 4 warning signs (and 2 that we don’t like too much) that we think you should know about.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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