DKSH Holding (VTX:DKSH) Seems To Use Debt Quite Sensibly

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 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 DKSH Holding AG (VTX:DKSH) does have debt on its balance sheet. But is this debt a concern to shareholders?

We check all companies for important risks. See what we found for DKSH Holding in our free report.

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does DKSH Holding Carry?

The image below, which you can click on for greater detail, shows that DKSH Holding had debt of CHF561.0m at the end of December 2024, a reduction from CHF680.7m over a year. But on the other hand it also has CHF609.1m in cash, leading to a CHF48.1m net cash position.

How Healthy Is DKSH Holding's Balance Sheet?

We can see from the most recent balance sheet that DKSH Holding had liabilities of CHF3.31b falling due within a year, and liabilities of CHF662.6m due beyond that. Offsetting these obligations, it had cash of CHF609.1m as well as receivables valued at CHF2.35b due within 12 months. So its liabilities total CHF1.01b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because DKSH Holding is worth CHF3.95b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, DKSH Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for DKSH Holding

Fortunately, DKSH Holding grew its EBIT by 6.1% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if DKSH Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Over the last three years, DKSH Holding recorded free cash flow worth a fulsome 94% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

Although DKSH Holding's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CHF48.1m. The cherry on top was that in converted 94% of that EBIT to free cash flow, bringing in CHF321m. So is DKSH Holding's debt a risk? It doesn't seem so to us. 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!

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.