Is Dyna-Mac Holdings (SGX:NO4) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Dyna-Mac Holdings Ltd. (SGX:NO4) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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

How Much Debt Does Dyna-Mac Holdings Carry?

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$106.3m in cash, so it actually has S$102.3m net cash.

How Healthy Is Dyna-Mac Holdings' Balance Sheet?

According to the last reported balance sheet, Dyna-Mac Holdings had liabilities of S$170.6m due within 12 months, and liabilities of S$27.2m due beyond 12 months. On the other hand, it had cash of S$106.3m 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$30.8m.

While this might seem like a lot, it is not so bad since Dyna-Mac Holdings has a market capitalization of S$103.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Dyna-Mac Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Dyna-Mac Holdings reported revenue of S$220m, which is a gain of 162%, although it did not report any earnings before interest and tax. 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 that doesn't change our opinion that the stock is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Dyna-Mac Holdings .

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.