Is Dyna-Mac Holdings (SGX:NO4) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Dyna-Mac Holdings Ltd. (SGX:NO4) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. 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. 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 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$4.04m at the end of December 2021, a reduction from S$5.00m over a year. However, its balance sheet shows it holds S$106.8m in cash, so it actually has S$102.8m net cash.

How Healthy Is Dyna-Mac Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dyna-Mac Holdings had liabilities of S$170.6m due within 12 months and liabilities of S$27.2m due beyond that. On the other hand, it had cash of S$106.8m and S$60.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$30.4m.

Of course, Dyna-Mac Holdings has a market capitalization of S$215.6m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Dyna-Mac Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Dyna-Mac Holdings'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.

In the last year Dyna-Mac Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 162%, to S$220m. So there's no doubt that shareholders are cheering for growth

So How Risky Is Dyna-Mac Holdings?

While Dyna-Mac Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of S$5.5m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. One positive is that Dyna-Mac Holdings is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. 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. Case in point: We've spotted 2 warning signs for Dyna-Mac Holdings you should be aware of.

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. 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.