Darco Water Technologies (SGX:BLR) Has Debt But No Earnings; Should You Worry?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Darco Water Technologies Limited (SGX:BLR) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Darco Water Technologies

What Is Darco Water Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that Darco Water Technologies had S$5.05m of debt in June 2024, down from S$5.71m, one year before. But it also has S$8.61m in cash to offset that, meaning it has S$3.56m net cash.

A Look At Darco Water Technologies' Liabilities

Zooming in on the latest balance sheet data, we can see that Darco Water Technologies had liabilities of S$36.8m due within 12 months and liabilities of S$7.39m due beyond that. Offsetting this, it had S$8.61m in cash and S$41.7m in receivables that were due within 12 months. So it actually has S$6.09m more liquid assets than total liabilities.

This surplus liquidity suggests that Darco Water Technologies' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Darco Water Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Darco Water Technologies's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Darco Water Technologies made a loss at the EBIT level, and saw its revenue drop to S$59m, which is a fall of 31%. To be frank that doesn't bode well.

So How Risky Is Darco Water Technologies?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Darco Water Technologies had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through S$2.9m of cash and made a loss of S$5.0m. While this does make the company a bit risky, it's important to remember it has net cash of S$3.56m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 instance, we've identified 2 warning signs for Darco Water Technologies that you should be aware of.

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.