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. We note that Dyna-Mac Holdings Ltd. (SGX:NO4) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Dyna-Mac Holdings Carry?
The image below, which you can click on for greater detail, shows that at June 2019 Dyna-Mac Holdings had debt of S$19.8m, up from S$9.33m in one year. However, its balance sheet shows it holds S$27.9m in cash, so it actually has S$8.11m net cash.
How Strong Is Dyna-Mac Holdings's Balance Sheet?
According to the last reported balance sheet, Dyna-Mac Holdings had liabilities of S$50.2m due within 12 months, and liabilities of S$29.9m due beyond 12 months. On the other hand, it had cash of S$27.9m and S$48.4m worth of receivables due within a year. So it has liabilities totalling S$3.86m more than its cash and near-term receivables, combined.
Given Dyna-Mac Holdings has a market capitalization of S$90.0m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Dyna-Mac Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Dyna-Mac Holdings'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.
In the last year Dyna-Mac Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by11%, to S$88m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Dyna-Mac Holdings?
Although Dyna-Mac Holdings had negative earnings before interest and tax (EBIT) over the last twelve months, it made a statutory profit of S$580k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. For riskier companies like Dyna-Mac Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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