Is Dillistone Group (LON:DSG) Using Debt In A Risky Way?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Dillistone Group Plc (LON:DSG) does carry debt. But is this debt a concern to shareholders?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Dillistone Group

What Is Dillistone Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Dillistone Group had UK£1.60m of debt in June 2022, down from UK£2.10m, one year before. However, it does have UK£608.0k in cash offsetting this, leading to net debt of about UK£992.0k.

A Look At Dillistone Group's Liabilities

According to the last reported balance sheet, Dillistone Group had liabilities of UK£2.98m due within 12 months, and liabilities of UK£2.28m due beyond 12 months. Offsetting these obligations, it had cash of UK£608.0k as well as receivables valued at UK£858.0k due within 12 months. So its liabilities total UK£3.80m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of UK£3.29m, we think shareholders really should watch Dillistone Group's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Dillistone Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Dillistone Group made a loss at the EBIT level, and saw its revenue drop to UK£5.6m, which is a fall of 2.7%. That's not what we would hope to see.

Caveat Emptor

Importantly, Dillistone Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable UK£453k at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of UK£78k didn't encourage us either; we'd like to see a profit. And until that time we think this is a 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. Be aware that Dillistone Group is showing 2 warning signs in our investment analysis , you should know about...

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.