Dyna-Mac Holdings (SGX:NO4) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Dyna-Mac Holdings Ltd. (SGX:NO4) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Dyna-Mac Holdings

What Is Dyna-Mac Holdings's Debt?

The image below, which you can click on for greater detail, shows that Dyna-Mac Holdings had debt of S$12.0m at the end of September 2020, a reduction from S$16.9m over a year. However, its balance sheet shows it holds S$27.7m in cash, so it actually has S$15.7m net cash.

A Look At Dyna-Mac Holdings's Liabilities

The latest balance sheet data shows that Dyna-Mac Holdings had liabilities of S$57.1m due within a year, and liabilities of S$31.2m falling due after that. Offsetting these obligations, it had cash of S$27.7m as well as receivables valued at S$25.5m due within 12 months. So it has liabilities totalling S$35.2m more than its cash and near-term receivables, combined.

Dyna-Mac Holdings has a market capitalization of S$103.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Dyna-Mac Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Dyna-Mac Holdings'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.

In the last year Dyna-Mac Holdings had a loss before interest and tax, and actually shrunk its revenue by 3.0%, to S$83m. That's not what we would hope to see.

So How Risky Is Dyna-Mac Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Dyna-Mac Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of S$15m and booked a S$71m accounting loss. With only S$15.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Dyna-Mac Holdings has 3 warning signs (and 2 which are concerning) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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