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

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.' 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 can see that DIRTT Environmental Solutions Ltd. (TSE:DRT) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for DIRTT Environmental Solutions

What Is DIRTT Environmental Solutions's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 DIRTT Environmental Solutions had debt of US$29.7m, up from US$5.22m in one year. But it also has US$43.3m in cash to offset that, meaning it has US$13.6m net cash.

A Look At DIRTT Environmental Solutions' Liabilities

Zooming in on the latest balance sheet data, we can see that DIRTT Environmental Solutions had liabilities of US$34.2m due within 12 months and liabilities of US$69.6m due beyond that. Offsetting this, it had US$43.3m in cash and US$17.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$42.9m.

This deficit isn't so bad because DIRTT Environmental Solutions is worth US$168.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, DIRTT Environmental Solutions boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, DIRTT Environmental Solutions made a loss at the EBIT level, and saw its revenue drop to US$147m, which is a fall of 20%. We would much prefer see growth.

So How Risky Is DIRTT Environmental Solutions?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months DIRTT Environmental Solutions lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$41m of cash and made a loss of US$42m. But the saving grace is the US$13.6m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 instance, we've identified 2 warning signs for DIRTT Environmental Solutions that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.