Dolphin International Berhad (KLSE:DOLPHIN) Is Making Moderate Use Of Debt

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.' 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 Dolphin International Berhad (KLSE:DOLPHIN) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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.

View our latest analysis for Dolphin International Berhad

What Is Dolphin International Berhad's Debt?

The chart below, which you can click on for greater detail, shows that Dolphin International Berhad had RM18.3m in debt in June 2022; about the same as the year before. On the flip side, it has RM7.38m in cash leading to net debt of about RM10.9m.

A Look At Dolphin International Berhad's Liabilities

The latest balance sheet data shows that Dolphin International Berhad had liabilities of RM19.3m due within a year, and liabilities of RM7.71m falling due after that. On the other hand, it had cash of RM7.38m and RM7.15m worth of receivables due within a year. So its liabilities total RM12.5m more than the combination of its cash and short-term receivables.

Dolphin International Berhad has a market capitalization of RM26.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. 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 17%, to RM10m. 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. Its EBIT loss was a whopping RM14m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RM13m 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Dolphin International Berhad (3 make us uncomfortable!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.