Diamond S Shipping (NYSE:DSSI) Has Debt But No Earnings; Should You Worry?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Diamond S Shipping Inc. (NYSE:DSSI) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Diamond S Shipping
What Is Diamond S Shipping's Debt?
You can click the graphic below for the historical numbers, but it shows that Diamond S Shipping had US$641.1m of debt in December 2018, down from US$691.7m, one year before. On the flip side, it has US$83.3m in cash leading to net debt of about US$557.8m.
How Strong Is Diamond S Shipping's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Diamond S Shipping had liabilities of US$126.9m due within 12 months and liabilities of US$543.1m due beyond that. On the other hand, it had cash of US$83.3m and US$43.3m worth of receivables due within a year. So it has liabilities totalling US$543.4m more than its cash and near-term receivables, combined.
Given this deficit is actually higher than the company's market capitalization of US$444.9m, we think shareholders really should watch Diamond S Shipping's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Diamond S Shipping can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Diamond S Shipping managed to grow its revenue by 22%, to US$369m. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
While we can certainly savour Diamond S Shipping's tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. To be specific the EBIT loss came in at US$32m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of-US$86.1m. And until that time we think this is a risky stock. For riskier companies like Diamond S Shipping I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
