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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that DKSH Holding AG (VTX:DKSH) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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 CHF292.2m at the end of June 2022, a reduction from CHF337.8m over a year. But it also has CHF598.5m in cash to offset that, meaning it has CHF306.3m net cash.

How Healthy Is DKSH Holding's Balance Sheet?

The latest balance sheet data shows that DKSH Holding had liabilities of CHF3.15b due within a year, and liabilities of CHF425.8m falling due after that. On the other hand, it had cash of CHF598.5m and CHF2.42b worth of receivables due within a year. So its liabilities total CHF564.1m more than the combination of its cash and short-term receivables.

Since publicly traded DKSH Holding shares are worth a total of CHF4.66b, it seems unlikely that this level of liabilities would be a major threat. 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.

Also good is that DKSH Holding grew its EBIT at 10% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While DKSH Holding does have more liabilities than liquid assets, it also has net cash of CHF306.3m. And it impressed us with free cash flow of CHF297m, being 109% of its EBIT. So is DKSH Holding's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of DKSH Holding's earnings per share history for free.

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.