Daisho Microline Holdings (HKG:567) Is Making Moderate Use Of 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. Importantly, Daisho Microline Holdings Limited (HKG:567) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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, 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.

View our latest analysis for Daisho Microline Holdings

What Is Daisho Microline Holdings's Debt?

As you can see below, Daisho Microline Holdings had HK$85.2m of debt at September 2020, down from HK$123.0m a year prior. However, it does have HK$74.3m in cash offsetting this, leading to net debt of about HK$10.9m.

A Look At Daisho Microline Holdings's Liabilities

Zooming in on the latest balance sheet data, we can see that Daisho Microline Holdings had liabilities of HK$126.6m due within 12 months and liabilities of HK$10.3m due beyond that. Offsetting these obligations, it had cash of HK$74.3m as well as receivables valued at HK$27.2m due within 12 months. So it has liabilities totalling HK$35.4m more than its cash and near-term receivables, combined.

Daisho Microline Holdings has a market capitalization of HK$117.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. 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 Daisho Microline Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Daisho Microline Holdings made a loss at the EBIT level, and saw its revenue drop to HK$48m, which is a fall of 98%. That makes us nervous, to say the least.

Caveat Emptor

While Daisho Microline 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$32m. 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 HK$24m of cash over the last year. So in short it's a really 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. Case in point: We've spotted 2 warning signs for Daisho Microline Holdings you should be aware of.

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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