Does Decmil Group (ASX:DCG) use debt wisely?

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Decmil Group Limited (ASX:DCG) uses debt. But the more important question is: what risk does this debt create?

When is debt dangerous?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Check out our latest analysis for Decmil Group

What is the net debt of the Decmil group?

As you can see below, at the end of June 2022, the Decmil Group had a debt of 37.3 million Australian dollars, compared to 17.8 million Australian dollars a year ago. Click on the image for more details. But on the other hand, he also has A$39.3 million in cash, resulting in a net cash position of A$1.94 million.

A look at the liabilities of the Decmil group

According to the latest published balance sheet, Decmil Group had liabilities of A$143.8 million due within 12 months and liabilities of A$42.2 million due beyond 12 months. As compensation for these obligations, it had cash of A$39.3 million as well as receivables valued at A$53.4 million and due within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables of A$93.3 million.

This deficit casts a shadow over the company of 31.1 million Australian dollars, like a colossus towering over mere mortals. We would therefore be watching his balance sheet closely, no doubt. Ultimately, Decmil Group would likely need a major recapitalization if its creditors were to demand repayment. Given that the Decmil group has more cash than debt, we are quite confident that it can manage its debt, despite the fact that it has a lot of debt in total. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Decmil Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Last year, Decmil Group was not profitable in terms of EBIT, but managed to increase its turnover by 24%, to 378 million Australian dollars. With a little luck, the company will be able to progress towards profitability.

So, how risky is the Decmil group?

Although the Decmil Group recorded a loss of earnings before interest and tax (EBIT) over the last twelve months, it generated a positive free cash flow of 4.7 million Australian dollars. So taking that at face value and given the net cash position, we don’t think the stock is too risky in the near term. One bright spot was revenue growth of 24% over last year. But the title still seems risky to us. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 1 warning sign with Decmil Group, and understanding them should be part of your investment process.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.