Dimmi Life Holdings (HKG:1667) Is Making Moderate Use 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.' 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. Importantly, Dimmi Life Holdings Limited (HKG:1667) does carry debt. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Dimmi Life Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Dimmi Life Holdings had debt of HK$168.7m at the end of September 2024, a reduction from HK$192.3m over a year. However, it also had HK$13.7m in cash, and so its net debt is HK$154.9m.

A Look At Dimmi Life Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Dimmi Life Holdings had liabilities of HK$92.4m due within 12 months and liabilities of HK$170.4m due beyond that. On the other hand, it had cash of HK$13.7m and HK$198.0m worth of receivables due within a year. So it has liabilities totalling HK$51.1m more than its cash and near-term receivables, combined.

Dimmi Life Holdings has a market capitalization of HK$196.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Dimmi Life Holdings's earnings that will influence how the balance sheet holds up in the future. 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.

Check out our latest analysis for Dimmi Life Holdings

In the last year Dimmi Life Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to HK$120m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Dimmi Life Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$87m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$57m in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Dimmi Life Holdings (2 shouldn't be ignored) you should be aware of.

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.