We Think DKSH Holding (VTX:DKSH) Can Stay On Top Of Its Debt
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. 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 can see that DKSH Holding Ltd. (VTX:DKSH) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
View our latest analysis for DKSH Holding
How Much Debt Does DKSH Holding Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 DKSH Holding had CHF278.0m of debt, an increase on CHF138.2m, over one year. However, it does have CHF480.1m in cash offsetting this, leading to net cash of CHF202.1m.
A Look At DKSH Holding's Liabilities
According to the last reported balance sheet, DKSH Holding had liabilities of CHF3.17b due within 12 months, and liabilities of CHF398.7m due beyond 12 months. Offsetting these obligations, it had cash of CHF480.1m as well as receivables valued at CHF2.66b due within 12 months. So it has liabilities totalling CHF424.8m more than its cash and near-term receivables, combined.
Since publicly traded DKSH Holding shares are worth a total of CHF3.26b, 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, DKSH Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.
On the other hand, DKSH Holding's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if DKSH Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While DKSH Holding has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, DKSH Holding produced sturdy free cash flow equating to 56% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Summing up
While DKSH Holding does have more liabilities than liquid assets, it also has net cash of CHF202.1m. So we don't have any problem with DKSH Holding's use of debt. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check DKSH Holding's dividend history, without delay!
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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
