Is D-Link (TWSE:2332) Using Debt Sensibly?

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.' 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. We note that D-Link Corporation (TWSE:2332) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for D-Link

What Is D-Link's Net Debt?

You can click the graphic below for the historical numbers, but it shows that D-Link had NT$559.4m of debt in September 2024, down from NT$681.6m, one year before. However, it does have NT$4.32b in cash offsetting this, leading to net cash of NT$3.76b.

How Strong Is D-Link's Balance Sheet?

We can see from the most recent balance sheet that D-Link had liabilities of NT$4.14b falling due within a year, and liabilities of NT$1.04b due beyond that. On the other hand, it had cash of NT$4.32b and NT$3.38b worth of receivables due within a year. So it actually has NT$2.52b more liquid assets than total liabilities.

It's good to see that D-Link has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, D-Link 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 D-Link'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, D-Link made a loss at the EBIT level, and saw its revenue drop to NT$15b, which is a fall of 12%. We would much prefer see growth.

So How Risky Is D-Link?

While D-Link lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of NT$175m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 learn about the 4 warning signs we've spotted with D-Link (including 1 which is a bit unpleasant) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.