Yahoo Finance Dajin Resources (CVE:DJI) May Be Weighed Down By Its Debt
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Dajin Resources Corp. (CVE:DJI) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Dajin Resources
How Much Debt Does Dajin Resources Carry?
The image below, which you can click on for greater detail, shows that at February 2019 Dajin Resources had debt of CA$89.0k, up from none in one year. However, it also had CA$30.8k in cash, and so its net debt is CA$58.2k.
A Look At Dajin Resources's Liabilities
Zooming in on the latest balance sheet data, we can see that Dajin Resources had liabilities of CA$1.42m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of CA$30.8k as well as receivables valued at CA$6.9k due within 12 months. So it has liabilities totalling CA$1.38m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Dajin Resources has a market capitalization of CA$6.85m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. But either way, Dajin Resources has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Dajin Resources 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.
Since Dajin Resources has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.
Caveat Emptor
Over the last twelve months Dajin Resources produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$1.1m 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. However, it doesn't help that it burned through CA$991k of cash over the last year. So in short it's a really risky stock. 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 Dajin Resources insider transactions.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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