Is Dimerix (ASX:DXB) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Dimerix Limited (ASX:DXB) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Dimerix

What Is Dimerix's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Dimerix had debt of AU$5.94m, up from none in one year. However, its balance sheet shows it holds AU$7.99m in cash, so it actually has AU$2.06m net cash.

How Strong Is Dimerix's Balance Sheet?

We can see from the most recent balance sheet that Dimerix had liabilities of AU$11.8m falling due within a year, and liabilities of AU$38.1k due beyond that. Offsetting these obligations, it had cash of AU$7.99m as well as receivables valued at AU$9.55m due within 12 months. So it can boast AU$5.75m more liquid assets than total liabilities.

This surplus suggests that Dimerix has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Dimerix has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dimerix's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Since Dimerix doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is Dimerix?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Dimerix had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$13m of cash and made a loss of AU$14m. Given it only has net cash of AU$2.06m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should learn about the 5 warning signs we've spotted with Dimerix (including 3 which are a bit unpleasant) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 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.