Is Daisho Microline Holdings (HKG:567) A Risky Investment?

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 note that Daisho Microline Holdings Limited (HKG:567) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Daisho Microline Holdings

What Is Daisho Microline Holdings's Net 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, because it has a cash reserve of HK$74.3m, its net debt is less, at about HK$10.9m.

How Strong Is Daisho Microline Holdings' Balance Sheet?

The latest balance sheet data shows that Daisho Microline Holdings had liabilities of HK$126.6m due within a year, and liabilities of HK$10.3m falling due after 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$127.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Daisho Microline 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 Daisho Microline Holdings had a loss before interest and tax, and actually shrunk its revenue by 98%, to HK$48m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Daisho Microline Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$35m. 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. We would feel better if it turned its trailing twelve month loss of HK$50m into a profit. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Daisho Microline Holdings that you should be aware of before investing here.

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. 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.
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