We Think DMG Blockchain Solutions (CVE:DMGI) Has A Fair Chunk Of Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies DMG Blockchain Solutions Inc. (CVE:DMGI) makes use of debt. But the more important question is: how much risk is that debt creating?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for DMG Blockchain Solutions

What Is DMG Blockchain Solutions's Debt?

As you can see below, at the end of March 2024, DMG Blockchain Solutions had CA$12.1m of debt, up from CA$1.26m a year ago. Click the image for more detail. However, it does have CA$2.11m in cash offsetting this, leading to net debt of about CA$10.0m.

How Strong Is DMG Blockchain Solutions' Balance Sheet?

The latest balance sheet data shows that DMG Blockchain Solutions had liabilities of CA$17.7m due within a year, and liabilities of CA$71.9k falling due after that. Offsetting this, it had CA$2.11m in cash and CA$2.10m in receivables that were due within 12 months. So its liabilities total CA$13.5m more than the combination of its cash and short-term receivables.

Given DMG Blockchain Solutions has a market capitalization of CA$93.4m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine DMG Blockchain Solutions's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, DMG Blockchain Solutions reported revenue of CA$33m, which is a gain of 3.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, DMG Blockchain Solutions had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$12m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$14m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For example, we've discovered 3 warning signs for DMG Blockchain Solutions (2 don't sit too well with us!) that you should be aware of before investing here.

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.

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