Health Check: How Prudently Does DIRTT Environmental Solutions (TSE:DRT) Use Debt?

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.' 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. As with many other companies DIRTT Environmental Solutions Ltd. (TSE:DRT) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for DIRTT Environmental Solutions

How Much Debt Does DIRTT Environmental Solutions Carry?

The chart below, which you can click on for greater detail, shows that DIRTT Environmental Solutions had US$55.2m in debt in June 2023; about the same as the year before. On the flip side, it has US$18.9m in cash leading to net debt of about US$36.3m.

How Strong Is DIRTT Environmental Solutions' Balance Sheet?

We can see from the most recent balance sheet that DIRTT Environmental Solutions had liabilities of US$35.3m falling due within a year, and liabilities of US$97.1m due beyond that. On the other hand, it had cash of US$18.9m and US$16.1m worth of receivables due within a year. So it has liabilities totalling US$97.5m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$33.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, DIRTT Environmental Solutions would likely require a major re-capitalisation if it had to pay its creditors today. 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 DIRTT Environmental Solutions'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.

Over 12 months, DIRTT Environmental Solutions reported revenue of US$171m, which is a gain of 6.6%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months DIRTT Environmental Solutions produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$25m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized US$7.8m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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 4 warning signs for DIRTT Environmental Solutions (1 is concerning!) that you should be aware of before investing here.

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.