Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Dogness (International) Corporation (NASDAQ:DOGZ) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Dogness (International)'s Debt?

The chart below, which you can click on for greater detail, shows that Dogness (International) had US$5.49m in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds US$6.96m in cash, so it actually has US$1.47m net cash.

How Healthy 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 total US$12.9m more than the combination of its cash and short-term receivables.

Since publicly traded Dogness (International) shares are worth a total of US$569.6m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Dogness (International) also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Dogness (International)'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.

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. However, it has net cash of US$1.47m, so it has a bit of time before it will need more capital. 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. However, not all investment risk resides within the balance sheet - far from it.

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.

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.