Health Check: How Prudently Does Dynatronics (NASDAQ:DYNT) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Dynatronics Corporation (NASDAQ:DYNT) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Dynatronics

How Much Debt Does Dynatronics Carry?

As you can see below, Dynatronics had US$3.50m of debt at March 2021, down from US$6.54m a year prior. But it also has US$4.50m in cash to offset that, meaning it has US$998.9k net cash.

How Healthy Is Dynatronics' Balance Sheet?

The latest balance sheet data shows that Dynatronics had liabilities of US$11.4m due within a year, and liabilities of US$5.95m falling due after that. Offsetting this, it had US$4.50m in cash and US$7.38m in receivables that were due within 12 months. So it has liabilities totalling US$5.48m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Dynatronics has a market capitalization of US$22.4m, 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. While it does have liabilities worth noting, Dynatronics also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dynatronics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Dynatronics had a loss before interest and tax, and actually shrunk its revenue by 28%, to US$44m. That makes us nervous, to say the least.

So How Risky Is Dynatronics?

Although Dynatronics had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$723k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Dynatronics , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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