Is Dolphin International Berhad (KLSE:DOLPHIN) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Dolphin International Berhad

How Much Debt Does Dolphin International Berhad Carry?

The chart below, which you can click on for greater detail, shows that Dolphin International Berhad had RM18.5m in debt in December 2021; about the same as the year before. However, because it has a cash reserve of RM15.2m, its net debt is less, at about RM3.32m.

How Healthy Is Dolphin International Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dolphin International Berhad had liabilities of RM19.0m due within 12 months and liabilities of RM8.42m due beyond that. On the other hand, it had cash of RM15.2m and RM3.97m worth of receivables due within a year. So its liabilities total RM8.26m more than the combination of its cash and short-term receivables.

Since publicly traded Dolphin International Berhad shares are worth a total of RM58.0m, 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 Dolphin International Berhad'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.

Over 12 months, Dolphin International Berhad made a loss at the EBIT level, and saw its revenue drop to RM7.6m, which is a fall of 12%. We would much prefer see growth.

Caveat Emptor

Not only did Dolphin International Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at RM4.8m. 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 RM4.2m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Case in point: We've spotted 5 warning signs for Dolphin International Berhad you should be aware of, and 1 of them is a bit concerning.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.