Would DMS Imaging (EBR:ALIMG) Be Better Off With Less Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that DMS Imaging SA (EBR:ALIMG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for DMS Imaging

What Is DMS Imaging's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 DMS Imaging had €18.8m of debt, an increase on €9.94m, over one year. On the flip side, it has €4.20m in cash leading to net debt of about €14.6m.

A Look At DMS Imaging's Liabilities

We can see from the most recent balance sheet that DMS Imaging had liabilities of €19.3m falling due within a year, and liabilities of €14.5m due beyond that. Offsetting these obligations, it had cash of €4.20m as well as receivables valued at €5.98m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €23.7m.

This is a mountain of leverage relative to its market capitalization of €31.0m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since DMS Imaging will need earnings to service that debt. 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 DMS Imaging wasn't profitable at an EBIT level, but managed to grow its revenue by 15%, to €43m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, DMS Imaging had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €135k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €4.8m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for DMS Imaging (2 are a bit unpleasant) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com