DKSH Holding (VTX:DKSH) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for DKSH Holding

What Is DKSH Holding's Net Debt?

The image below, which you can click on for greater detail, shows that DKSH Holding had debt of CHF306.4m at the end of December 2021, a reduction from CHF338.6m over a year. But it also has CHF673.7m in cash to offset that, meaning it has CHF367.3m net cash.

How Strong Is DKSH Holding's Balance Sheet?

According to the last reported balance sheet, DKSH Holding had liabilities of CHF3.06b due within 12 months, and liabilities of CHF402.0m due beyond 12 months. Offsetting this, it had CHF673.7m in cash and CHF2.36b in receivables that were due within 12 months. So it has liabilities totalling CHF428.6m more than its cash and near-term receivables, combined.

Of course, DKSH Holding has a market capitalization of CHF4.96b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

And we also note warmly that DKSH Holding grew its EBIT by 11% last year, making its debt load easier to handle. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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 CHF367.3m. And it impressed us with free cash flow of CHF338m, being 108% of its EBIT. So we don't think DKSH Holding's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in DKSH Holding, you may well want to click here to check an interactive graph of its earnings per share history.

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.