Is Daily Journal (NASDAQ:DJCO) A Risky Investment?

Warren Buffett famously said, '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. As with many other companies Daily Journal Corporation (NASDAQ:DJCO) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Daily Journal

What Is Daily Journal's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Daily Journal had US$76.5m of debt, an increase on US$33.6m, over one year. But on the other hand it also has US$350.7m in cash, leading to a US$274.3m net cash position.

How Healthy Is Daily Journal's Balance Sheet?

We can see from the most recent balance sheet that Daily Journal had liabilities of US$30.2m falling due within a year, and liabilities of US$130.5m due beyond that. On the other hand, it had cash of US$350.7m and US$14.6m worth of receivables due within a year. So it actually has US$204.6m more liquid assets than total liabilities.

This luscious liquidity implies that Daily Journal's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Daily Journal has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Daily Journal will need earnings to service that debt. 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.

In the last year Daily Journal had a loss before interest and tax, and actually shrunk its revenue by 9.3%, to US$46m. We would much prefer see growth.

So How Risky Is Daily Journal?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Daily Journal had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$6.6m and booked a US$32m accounting loss. Given it only has net cash of US$274.3m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Daily Journal I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.