Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Dogness (International) Corporation (NASDAQ:DOGZ) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Dogness (International)'s Debt?

As you can see below, Dogness (International) had US$5.49m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has US$6.96m in cash to offset that, meaning it has US$1.47m net cash.

How Strong Is Dogness (International)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dogness (International) had liabilities of US$8.54m due within 12 months and liabilities of US$14.3m due beyond that. Offsetting this, it had US$6.96m in cash and US$2.95m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$12.9m.

Given Dogness (International) has a market capitalization of US$569.6m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Dogness (International) 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 you can't view debt in total isolation; since Dogness (International) 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.

Over 12 months, Dogness (International) made a loss at the EBIT level, and saw its revenue drop to US$15m, which is a fall of 16%. We would much prefer see growth.

So How Risky Is Dogness (International)?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Dogness (International) had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$2.7m of cash and made a loss of US$6.1m. But at least it has US$1.47m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Dogness (International) (2 don't sit too well with us!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.