Here's Why Dolphin International Berhad (KLSE:DOLPHIN) Can Afford Some Debt

Warren Buffett famously said, '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. We can see that Dolphin International Berhad (KLSE:DOLPHIN) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Dolphin International Berhad

What Is Dolphin International Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Dolphin International Berhad had debt of RM6.83m at the end of March 2024, a reduction from RM17.8m over a year. However, it does have RM998.0k in cash offsetting this, leading to net debt of about RM5.83m.

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 RM11.4m falling due within a year, and liabilities of RM8.38m due beyond that. On the other hand, it had cash of RM998.0k and RM2.22m worth of receivables due within a year. So its liabilities total RM16.6m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of RM20.7m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Dolphin International Berhad made a loss at the EBIT level, and saw its revenue drop to RM15m, which is a fall of 6.5%. That's not what we would hope to see.

Caveat Emptor

Importantly, Dolphin International Berhad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable RM16m at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of RM14m into a profit. 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. For example, we've discovered 3 warning signs for Dolphin International Berhad (2 are significant!) 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. 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.