Is Dimmi Life Holdings (HKG:1667) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Dimmi Life Holdings Limited (HKG:1667) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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.

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 at March 2023 Dimmi Life Holdings had debt of HK$210.6m, up from HK$196.6m in one year. On the flip side, it has HK$13.9m in cash leading to net debt of about HK$196.8m.

A Look At Dimmi Life Holdings' Liabilities

According to the last reported balance sheet, Dimmi Life Holdings had liabilities of HK$93.9m due within 12 months, and liabilities of HK$217.5m due beyond 12 months. Offsetting this, it had HK$13.9m in cash and HK$236.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$61.1m.

While this might seem like a lot, it is not so bad since Dimmi Life Holdings has a market capitalization of HK$240.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dimmi Life Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Dimmi Life Holdings had a loss before interest and tax, and actually shrunk its revenue by 9.3%, to HK$109m. That's not what we would hope to see.

Caveat Emptor

Importantly, Dimmi Life Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$34m 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. For example, we would not want to see a repeat of last year's loss of HK$27m. So we do think this stock is quite 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. To that end, you should learn about the 2 warning signs we've spotted with Dimmi Life Holdings (including 1 which is a bit unpleasant) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.