Is Danto Holdings (TSE:5337) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Danto Holdings Corporation (TSE:5337) makes use of debt. But the real question is whether this debt is making the company risky.

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 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 Danto Holdings

How Much Debt Does Danto Holdings Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Danto Holdings had debt of JP¥489.0m, up from JP¥250.0m in one year. However, because it has a cash reserve of JP¥218.0m, its net debt is less, at about JP¥271.0m.

How Strong Is Danto Holdings' Balance Sheet?

According to the last reported balance sheet, Danto Holdings had liabilities of JP¥1.11b due within 12 months, and liabilities of JP¥1.23b due beyond 12 months. Offsetting this, it had JP¥218.0m in cash and JP¥1.18b in receivables that were due within 12 months. So it has liabilities totalling JP¥940.0m more than its cash and near-term receivables, combined.

Since publicly traded Danto Holdings shares are worth a total of JP¥9.33b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Danto 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 Danto Holdings had a loss before interest and tax, and actually shrunk its revenue by 4.0%, to JP¥5.3b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Danto Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable JP¥1.0b 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. Another cause for caution is that is bled JP¥1.4b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Danto Holdings (including 2 which can't be ignored) .

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.