Is Dolphin International Berhad (KLSE:DOLPHIN) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Dolphin International Berhad (KLSE:DOLPHIN) makes use of debt. But should shareholders be worried about its use of debt?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Dolphin International Berhad

What Is Dolphin International Berhad's Net Debt?

As you can see below, Dolphin International Berhad had RM18.3m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, it also had RM5.67m in cash, and so its net debt is RM12.6m.

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 RM35.1m falling due within a year, and liabilities of RM7.91m due beyond that. Offsetting this, it had RM5.67m in cash and RM7.91m in receivables that were due within 12 months. So its liabilities total RM29.5m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the RM13.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Dolphin International Berhad would probably need a major re-capitalization if its creditors were to demand repayment. 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 48%, to RM13m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Dolphin International Berhad's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable RM6.4m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through RM4.2m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Dolphin International Berhad (of which 3 make us uncomfortable!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.