Is DIRTT Environmental Solutions (TSE:DRT) Using Debt Sensibly?

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.' 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. Importantly, DIRTT Environmental Solutions Ltd. (TSE:DRT) does carry 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for DIRTT Environmental Solutions

How Much Debt Does DIRTT Environmental Solutions Carry?

As you can see below, at the end of December 2021, DIRTT Environmental Solutions had US$55.8m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$60.3m in cash, so it actually has US$4.52m net cash.

How Healthy Is DIRTT Environmental Solutions' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DIRTT Environmental Solutions had liabilities of US$37.1m due within 12 months and liabilities of US$94.6m due beyond that. Offsetting this, it had US$60.3m in cash and US$17.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$53.8m.

DIRTT Environmental Solutions has a market capitalization of US$111.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, DIRTT Environmental Solutions boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if DIRTT Environmental Solutions can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, DIRTT Environmental Solutions made a loss at the EBIT level, and saw its revenue drop to US$148m, which is a fall of 14%. That's not what we would hope to see.

So How Risky Is DIRTT Environmental Solutions?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that DIRTT Environmental Solutions 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 US$45m and booked a US$54m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$4.52m. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with DIRTT Environmental Solutions (including 2 which are a bit concerning) .

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.