Does Direct Communication Solutions (CSE:DCSI) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Direct Communication Solutions, Inc. (CSE:DCSI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Direct Communication Solutions

What Is Direct Communication Solutions's Debt?

As you can see below, at the end of September 2021, Direct Communication Solutions had US$1.61m of debt, up from US$899.2k a year ago. Click the image for more detail. However, it does have US$451.4k in cash offsetting this, leading to net debt of about US$1.16m.

How Healthy Is Direct Communication Solutions' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Direct Communication Solutions had liabilities of US$3.89m due within 12 months and no liabilities due beyond that. On the other hand, it had cash of US$451.4k and US$1.52m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.92m.

Direct Communication Solutions has a market capitalization of US$6.17m, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Direct Communication Solutions's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Direct Communication Solutions reported revenue of US$15m, which is a gain of 5.2%, 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, Direct Communication Solutions had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$2.2m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$2.8m of cash over the last year. So suffice it to say we consider the stock very risky. 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. To that end, you should learn about the 5 warning signs we've spotted with Direct Communication Solutions (including 3 which shouldn't be ignored) .

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.