Is DIRTT Environmental Solutions (TSE:DRT) Using Debt In A Risky Way?

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 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. As with many other companies DIRTT Environmental Solutions Ltd. (TSE:DRT) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for DIRTT Environmental Solutions

What Is DIRTT Environmental Solutions's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 DIRTT Environmental Solutions had US$5.22m of debt, an increase on none, over one year. But it also has US$50.7m in cash to offset that, meaning it has US$45.5m net cash.

A Look At DIRTT Environmental Solutions' Liabilities

According to the last reported balance sheet, DIRTT Environmental Solutions had liabilities of US$35.9m due within 12 months, and liabilities of US$30.5m due beyond 12 months. Offsetting this, it had US$50.7m in cash and US$20.8m in receivables that were due within 12 months. So it can boast US$5.10m more liquid assets than total liabilities.

This surplus suggests that DIRTT Environmental Solutions has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that DIRTT Environmental Solutions 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 ultimately the future profitability of the business will decide if DIRTT Environmental Solutions can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year DIRTT Environmental Solutions had a loss before interest and tax, and actually shrunk its revenue by 32%, to US$183m. To be frank that doesn't bode well.

So How Risky Is DIRTT Environmental Solutions?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year DIRTT Environmental Solutions had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$12m and booked a US$15m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$45.5m. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 1 warning sign for DIRTT Environmental Solutions that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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