Is Digihost Technology (CVE:DGHI) Weighed On By Its Debt Load?

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, Digihost Technology Inc. (CVE:DGHI) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

What Is Digihost Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Digihost Technology had US$2.20m of debt in March 2023, down from US$10.0m, one year before. However, its balance sheet shows it holds US$2.30m in cash, so it actually has US$98.8k net cash.

A Look At Digihost Technology's Liabilities

The latest balance sheet data shows that Digihost Technology had liabilities of US$4.94m due within a year, and liabilities of US$8.11m falling due after that. Offsetting these obligations, it had cash of US$2.30m as well as receivables valued at US$545.4k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$10.2m.

Of course, Digihost Technology has a market capitalization of US$52.3m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Digihost Technology 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.

In the last year Digihost Technology had a loss before interest and tax, and actually shrunk its revenue by 24%, to US$21m. That makes us nervous, to say the least.

So How Risky Is Digihost Technology?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Digihost Technology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$5.7m of cash and made a loss of US$17m. Given it only has net cash of US$98.8k, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Digihost Technology (1 is potentially serious!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.