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

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. We can see that Damstra Holdings Limited (ASX:DTC) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Damstra Holdings

What Is Damstra Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Damstra Holdings had AU$10.1m of debt in June 2022, down from AU$11.6m, one year before. But on the other hand it also has AU$10.1m in cash, leading to a AU$40.0k net cash position.

How Strong Is Damstra Holdings' Balance Sheet?

We can see from the most recent balance sheet that Damstra Holdings had liabilities of AU$19.0m falling due within a year, and liabilities of AU$12.3m due beyond that. Offsetting this, it had AU$10.1m in cash and AU$5.04m in receivables that were due within 12 months. So it has liabilities totalling AU$16.2m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Damstra Holdings has a market capitalization of AU$38.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Damstra Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 7.2%, to AU$29m. We usually like to see faster growth from unprofitable companies, but each to their own.

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. And over the same period it saw negative free cash outflow of AU$11m and booked a AU$67m accounting loss. However, it has net cash of AU$40.0k, so it has a bit of time before it will need more capital. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Damstra Holdings (1 can't be ignored) you should be aware of.

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.