Does Dolphin International Berhad (KLSE:DOLPHIN) Have A Healthy Balance Sheet?

Simply Wall St
January 19, 2022
Source: Shutterstock

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.' 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. Importantly, Dolphin International Berhad (KLSE:DOLPHIN) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Dolphin International Berhad

How Much Debt Does Dolphin International Berhad Carry?

As you can see below, at the end of September 2021, Dolphin International Berhad had RM18.6m of debt, up from RM17.8m a year ago. Click the image for more detail. On the flip side, it has RM12.3m in cash leading to net debt of about RM6.31m.

KLSE:DOLPHIN Debt to Equity History January 19th 2022

How Healthy Is Dolphin International Berhad's Balance Sheet?

We can see from the most recent balance sheet that Dolphin International Berhad had liabilities of RM18.8m falling due within a year, and liabilities of RM8.41m due beyond that. Offsetting this, it had RM12.3m in cash and RM2.95m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM11.9m.

Since publicly traded Dolphin International Berhad shares are worth a total of RM79.1m, 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 you can't view debt in total isolation; since Dolphin International Berhad 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.

In the last year Dolphin International Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 2.8%, to RM8.7m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Dolphin International Berhad produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at RM6.0m. 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 RM23m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Dolphin International Berhad is showing 5 warning signs in our investment analysis , and 2 of those shouldn'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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