Is Dimmi Life Holdings (HKG:1667) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Dimmi Life Holdings Limited (HKG:1667) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Dimmi Life Holdings

How Much Debt Does Dimmi Life Holdings Carry?

The image below, which you can click on for greater detail, shows that Dimmi Life Holdings had debt of HK$166.9m at the end of March 2024, a reduction from HK$210.6m over a year. However, because it has a cash reserve of HK$11.4m, its net debt is less, at about HK$155.5m.

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$90.6m due within 12 months and liabilities of HK$170.0m due beyond that. Offsetting this, it had HK$11.4m in cash and HK$196.5m in receivables that were due within 12 months. So its liabilities total HK$52.8m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Dimmi Life Holdings has a market capitalization of HK$235.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 reported revenue of HK$122m, which is a gain of 11%, 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

Over the last twelve months Dimmi Life Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$88m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled HK$40m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. We've identified 3 warning signs with Dimmi Life Holdings (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

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.