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.' 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 Donaco International Limited (ASX:DNA) does use debt in its business. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Donaco International Carry?
You can click the graphic below for the historical numbers, but it shows that Donaco International had AU$11.8m of debt in December 2020, down from AU$27.8m, one year before. However, it does have AU$12.7m in cash offsetting this, leading to net cash of AU$857.3k.
A Look At Donaco International's Liabilities
The latest balance sheet data shows that Donaco International had liabilities of AU$32.4m due within a year, and liabilities of AU$7.52m falling due after that. Offsetting this, it had AU$12.7m in cash and AU$1.83m in receivables that were due within 12 months. So its liabilities total AU$25.4m more than the combination of its cash and short-term receivables.
Donaco International has a market capitalization of AU$65.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Donaco International 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 you can't view debt in total isolation; since Donaco International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Donaco International had a loss before interest and tax, and actually shrunk its revenue by 78%, to AU$19m. To be frank that doesn't bode well.
So How Risky Is Donaco International?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Donaco International lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$9.7m and booked a AU$15m accounting loss. Given it only has net cash of AU$857.3k, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Donaco International (2 can't be ignored!) that you should be aware of before investing here.
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 Donaco International, 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.