Duluth Holdings (NASDAQ:DLTH) Has Debt But No Earnings; Should You Worry?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Duluth Holdings Inc. (NASDAQ:DLTH) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Duluth Holdings

How Much Debt Does Duluth Holdings Carry?

As you can see below, at the end of April 2024, Duluth Holdings had US$36.8m of debt, up from US$26.5m a year ago. Click the image for more detail. However, it also had US$6.80m in cash, and so its net debt is US$30.0m.

A Look At Duluth Holdings' Liabilities

We can see from the most recent balance sheet that Duluth Holdings had liabilities of US$95.5m falling due within a year, and liabilities of US$160.6m due beyond that. Offsetting these obligations, it had cash of US$6.80m as well as receivables valued at US$12.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$236.5m.

This deficit casts a shadow over the US$113.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Duluth Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Duluth Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Duluth Holdings made a loss at the EBIT level, and saw its revenue drop to US$640m, which is a fall of 2.2%. That's not what we would hope to see.

Caveat Emptor

Importantly, Duluth Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$13m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$10m over the last twelve months. So suffice it to say we consider the stock to be risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Duluth Holdings insider transactions.

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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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.