Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that DMG Blockchain Solutions Inc. (CVE:DMGI) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is DMG Blockchain Solutions's Debt?
The image below, which you can click on for greater detail, shows that DMG Blockchain Solutions had debt of CA$2.75m at the end of June 2020, a reduction from CA$3.58m over a year. However, it does have CA$1.30m in cash offsetting this, leading to net debt of about CA$1.45m.
How Strong Is DMG Blockchain Solutions's Balance Sheet?
The latest balance sheet data shows that DMG Blockchain Solutions had liabilities of CA$7.53m due within a year, and liabilities of CA$204.9k falling due after that. On the other hand, it had cash of CA$1.30m and CA$1.44m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$5.0m.
DMG Blockchain Solutions has a market capitalization of CA$8.50m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is DMG Blockchain Solutions'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.
Over 12 months, DMG Blockchain Solutions made a loss at the EBIT level, and saw its revenue drop to CA$8.0m, which is a fall of 37%. To be frank that doesn't bode well.
Not only did DMG Blockchain Solutions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CA$4.3m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CA$3.9m into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for DMG Blockchain Solutions (2 are 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.
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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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