We Think DKSH Holding (VTX:DKSH) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies DKSH Holding AG (VTX:DKSH) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 2021 DKSH Holding had CHF337.8m of debt, an increase on CHF310.8m, over one year. But it also has CHF606.3m in cash to offset that, meaning it has CHF268.5m net cash.

How Strong Is DKSH Holding's Balance Sheet?

The latest balance sheet data shows that DKSH Holding had liabilities of CHF3.14b due within a year, and liabilities of CHF403.6m falling due after that. Offsetting this, it had CHF606.3m in cash and CHF2.48b in receivables that were due within 12 months. So it has liabilities totalling CHF448.5m more than its cash and near-term receivables, combined.

Since publicly traded DKSH Holding shares are worth a total of CHF4.84b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, DKSH Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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

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. And it impressed us with free cash flow of CHF348m, being 94% of its EBIT. So is DKSH Holding's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with DKSH Holding , and understanding them should be part of your investment process.

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.

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.

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