DKSH Holding (VTX:DKSH) Has A Rock Solid Balance Sheet

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.' 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. Importantly, DKSH Holding AG (VTX:DKSH) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for DKSH Holding

How Much Debt Does DKSH Holding Carry?

The image below, which you can click on for greater detail, shows that at June 2021 DKSH Holding had debt of CHF337.8m, up from CHF310.8m in one year. But on the other hand it also has CHF606.3m in cash, leading to a CHF268.5m net cash position.

How Healthy Is DKSH Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DKSH Holding had liabilities of CHF3.14b due within 12 months and liabilities of CHF403.6m due beyond that. On the other hand, it had cash of CHF606.3m and CHF2.48b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF448.5m.

Of course, DKSH Holding has a market capitalization of CHF4.92b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

The good news is that DKSH Holding has increased its EBIT by 6.5% over twelve months, which should ease any concerns about debt repayment. 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. DKSH Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, DKSH Holding generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about DKSH Holding's liabilities, but we can be reassured by the fact it has has net cash of CHF268.5m. The cherry on top was that in converted 94% of that EBIT to free cash flow, bringing in CHF348m. So we don't think DKSH Holding's use of debt is risky. 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. Be aware that DKSH Holding is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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. 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.
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