Dialog Group Berhad (KLSE: DIALOG) is it a risky investment?
Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital.” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that Berhad Dialogue Group (KLSE: DIALOG) uses debt in its business. But does this debt worry shareholders?
Why Does Debt Bring Risk?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first look at cash and debt levels, together.
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What is the debt of Dialog Group Berhad?
The graph below, which you can click for more details, shows Dialog Group Berhad owed RM 1.96 billion in debt as of September 2021; about the same as the year before. However, he also had RM 1.47 billion in cash, so his net debt is RM 495.4 million.
How strong is Dialog Group Berhad’s balance sheet?
According to the latest published balance sheet, Dialog Group Berhad had liabilities of RM 1.17 billion due within 12 months and liabilities of RM 1.62 billion due beyond 12 months. In compensation for these obligations, he had cash of RM 1.47 billion as well as receivables valued at RM 704.1 million due within 12 months. So he has a liability totaling RM 622.8 million more than his cash and short-term receivables combined.
Considering that Dialog Group Berhad has a market cap of Rs 14.3 billion, it is hard to believe that these liabilities pose a big threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). Thus, we look at debt versus earnings with and without amortization expenses.
Dialog Group Berhad’s net debt is only 0.83 times its EBITDA. And its EBIT covers its interest costs 17.9 times more. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Modest indebtedness may become crucial for Dialog Group Berhad if management cannot prevent a repeat of the 26% reduction in EBIT over the past year. Falling profits (if the trend continues) could potentially make even small debt risky enough. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Dialog Group Berhad’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Dialog Group Berhad has spent a lot of money. While this may be the result of spending for growth, it makes debt much riskier.
Our point of view
Dialog Group Berhad’s EBIT growth rate and conversion of EBIT to free cash flow certainly weighs on this, in our view. But her coverage of interest tells a very different story and suggests some resilience. Taking the above factors together, we believe Dialog Group Berhad’s debt presents certain risks to the business. While this debt may increase returns, we believe the company now has sufficient leverage. On top of most other metrics, we think it’s important to track how quickly earnings per share are growing, if at all. If you have understood this as well, you are in luck because today you can view this interactive graph of historical earnings per share of Dialog Group Berhad for free.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.