Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Like many other companies Dialight plc (LON: DIA) uses debt. But the most important question is: what risk does this debt create?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest analysis for Dialight
What is Dialight’s debt?
As you can see below, Dialight had £ 16.7million in debt, as of December 2020, which is roughly the same as the year before. You can click on the graph for more details. However, he also had £ 5.30million in cash, so his net debt is £ 11.4million.
How healthy is Dialight’s track record?
Zooming in on the latest balance sheet data, we can see that Dialight had a liability of £ 29.9million due within 12 months and a liability of £ 22.8million beyond. In return, he had £ 5.30 million in cash and £ 19.5 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by £ 27.9 million.
Dialight has a market cap of £ 101.1million, so it could very likely raise funds to improve its balance sheet, should the need arise. But we absolutely want to keep our eyes open for indications that its debt is too risky. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Dialight can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Over 12 months, Dialight recorded a loss in EBIT and saw sales fall to £ 119 million, a decrease of 21%. To be frank, that doesn’t bode well.
Not only has Dialight’s revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). To be precise, the EBIT loss amounted to £ 8.0million. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. Quite frankly, we think the record is far from up to par, although it could improve over time. For example, we wouldn’t want to see a repeat of last year’s £ 7.9million loss. In short, it is a really risky action. For riskier companies like Dialight, I always like to keep an eye on long-term profit and income trends. Fortunately, you can click to view our interactive graph of its operating profit, revenue and cash flow.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash growth net stocks today.
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