Here's Why Dimmi Life Holdings (HKG:1667) Can Afford Some 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.' 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 Dimmi Life Holdings Limited (HKG:1667) makes use of debt. But is this debt a concern to shareholders?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Dimmi Life Holdings

What Is Dimmi Life Holdings's Debt?

The image below, which you can click on for greater detail, shows that Dimmi Life Holdings had debt of HK$192.3m at the end of September 2023, a reduction from HK$204.6m over a year. On the flip side, it has HK$14.5m in cash leading to net debt of about HK$177.8m.

How Healthy Is Dimmi Life Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dimmi Life Holdings had liabilities of HK$86.9m due within 12 months and liabilities of HK$197.2m due beyond that. Offsetting this, it had HK$14.5m in cash and HK$216.7m in receivables that were due within 12 months. So its liabilities total HK$52.9m more than the combination of its cash and short-term receivables.

Given Dimmi Life Holdings has a market capitalization of HK$336.0m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Dimmi Life Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Dimmi Life Holdings made a loss at the EBIT level, and saw its revenue drop to HK$101m, which is a fall of 18%. We would much prefer see growth.

Caveat Emptor

While Dimmi Life Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$54m. 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. However, it doesn't help that it burned through HK$11m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Dimmi Life Holdings (of which 2 are a bit unpleasant!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.