Is Dundee (TSE:DC.A) Using Too Much 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.' 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 Dundee Corporation (TSE:DC.A) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Dundee

What Is Dundee's Debt?

As you can see below, Dundee had CA$44.6m of debt at December 2020, down from CA$51.6m a year prior. However, it does have CA$122.6m in cash offsetting this, leading to net cash of CA$77.9m.

How Strong Is Dundee's Balance Sheet?

We can see from the most recent balance sheet that Dundee had liabilities of CA$51.6m falling due within a year, and liabilities of CA$28.0m due beyond that. Offsetting these obligations, it had cash of CA$122.6m as well as receivables valued at CA$14.4m due within 12 months. So it actually has CA$57.4m more liquid assets than total liabilities.

This surplus liquidity suggests that Dundee's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Dundee boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Dundee 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.

Over 12 months, Dundee reported revenue of CA$32m, which is a gain of 11%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Dundee?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Dundee lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$25m and booked a CA$71m accounting loss. With only CA$77.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Dundee I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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. 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.
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