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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Digital Domain Holdings Limited (HKG:547) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Digital Domain Holdings Carry?

As you can see below, Digital Domain Holdings had HK$350.7m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have HK$636.5m in cash offsetting this, leading to net cash of HK$285.8m.

A Look At Digital Domain Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that Digital Domain Holdings had liabilities of HK$397.9m due within 12 months and liabilities of HK$348.7m due beyond that. Offsetting this, it had HK$636.5m in cash and HK$70.8m in receivables that were due within 12 months. So its liabilities total HK$39.3m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Digital Domain Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the HK$3.15b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Digital Domain Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Digital Domain 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.

In the last year Digital Domain Holdings had a loss before interest and tax, and actually shrunk its revenue by 23%, to HK$737m. That makes us nervous, to say the least.

So How Risky Is Digital Domain Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Digital Domain Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through HK$92m of cash and made a loss of HK$395m. While this does make the company a bit risky, it's important to remember it has net cash of HK$285.8m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Digital Domain Holdings you should be aware of, and 1 of them can't be ignored.

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.