Is DKSH Holding (VTX:DKSH) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, DKSH Holding AG (VTX:DKSH) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for DKSH Holding

How Much Debt Does DKSH Holding Carry?

As you can see below, DKSH Holding had CHF306.4m of debt at December 2021, down from CHF338.6m a year prior. But on the other hand it also has CHF673.7m in cash, leading to a CHF367.3m net cash position.

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. On the other hand, it had cash of CHF673.7m and CHF2.36b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF428.6m.

Of course, DKSH Holding has a market capitalization of CHF5.17b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, DKSH Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that DKSH Holding grew its EBIT at 11% over the last year, further increasing its ability to manage debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, DKSH Holding actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in CHF338m. 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.

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. 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.