Dynatronics (NASDAQ:DYNT) Is Carrying A Fair Bit Of 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 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, Dynatronics Corporation (NASDAQ:DYNT) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Dynatronics

How Much Debt Does Dynatronics Carry?

The image below, which you can click on for greater detail, shows that Dynatronics had debt of US$3.56m at the end of September 2020, a reduction from US$5.33m over a year. However, because it has a cash reserve of US$2.19m, its net debt is less, at about US$1.37m.

A Look At Dynatronics's Liabilities

We can see from the most recent balance sheet that Dynatronics had liabilities of US$7.94m falling due within a year, and liabilities of US$9.24m due beyond that. On the other hand, it had cash of US$2.19m and US$6.62m worth of receivables due within a year. So it has liabilities totalling US$8.38m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$12.8m, so it does suggest shareholders should keep an eye on Dynatronics's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Dynatronics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Dynatronics had a loss before interest and tax, and actually shrunk its revenue by 21%, to US$49m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Dynatronics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$3.0m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$4.8m into a profit. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Dynatronics (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

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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