Health Check: How Prudently Does Dialight (LON:DIA) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Dialight plc (LON:DIA) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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 Dialight

What Is Dialight's Net Debt?

As you can see below, Dialight had US$22.8m of debt at September 2024, down from US$26.7m a year prior. However, it also had US$7.40m in cash, and so its net debt is US$15.4m.

How Healthy Is Dialight's Balance Sheet?

We can see from the most recent balance sheet that Dialight had liabilities of US$55.9m falling due within a year, and liabilities of US$31.5m due beyond that. On the other hand, it had cash of US$7.40m and US$31.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$48.6m.

This is a mountain of leverage relative to its market capitalization of US$57.5m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Dialight'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.

In the last year Dialight had a loss before interest and tax, and actually shrunk its revenue by 5.0%, to US$180m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Dialight produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$21m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$7.4m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Dialight is showing 3 warning signs in our investment analysis , and 2 of those make us uncomfortable...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.