Is Digihost Technology (CVE:DGHI) Using Debt Sensibly?

Warren Buffett famously said, '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. Importantly, Digihost Technology Inc. (CVE:DGHI) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Digihost Technology

How Much Debt Does Digihost Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Digihost Technology had US$1.87m of debt, an increase on US$1.25m, over one year. However, it does have US$2.06m in cash offsetting this, leading to net cash of US$190.3k.

How Healthy Is Digihost Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Digihost Technology had liabilities of US$5.33m due within 12 months and liabilities of US$8.18m due beyond that. Offsetting these obligations, it had cash of US$2.06m as well as receivables valued at US$694.5k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$10.7m.

Digihost Technology has a market capitalization of US$36.2m, 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. While it does have liabilities worth noting, Digihost Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Digihost Technology's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Digihost Technology had a loss before interest and tax, and actually shrunk its revenue by 35%, to US$19m. To be frank that doesn't bode well.

So How Risky Is Digihost Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Digihost Technology had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$9.6m of cash and made a loss of US$29m. Given it only has net cash of US$190.3k, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Digihost Technology is showing 4 warning signs in our investment analysis , and 1 of those is potentially serious...

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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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.