Does Damstra Holdings (ASX:DTC) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Damstra Holdings Limited (ASX:DTC) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Damstra Holdings

What Is Damstra Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Damstra Holdings had debt of AU$10.8m, up from none in one year. However, it does have AU$18.7m in cash offsetting this, leading to net cash of AU$7.97m.

A Look At Damstra Holdings' Liabilities

According to the last reported balance sheet, Damstra Holdings had liabilities of AU$26.7m due within 12 months, and liabilities of AU$13.6m due beyond 12 months. On the other hand, it had cash of AU$18.7m and AU$4.87m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$16.8m.

This is a mountain of leverage relative to its market capitalization of AU$25.7m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Damstra Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Damstra Holdings'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 report on analyst profit forecasts to be interesting.

Over 12 months, Damstra Holdings reported revenue of AU$28m, which is a gain of 31%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Damstra Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Damstra Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$9.7m of cash and made a loss of AU$59m. But at least it has AU$7.97m on the balance sheet to spend on growth, near-term. Damstra Holdings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. Be aware that Damstra Holdings is showing 4 warning signs in our investment analysis , you should know about...

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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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.