Health Check: How Prudently Does Dickson Concepts (International) (HKG:113) Use Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Dickson Concepts (International) Limited (HKG:113) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Dickson Concepts (International)

How Much Debt Does Dickson Concepts (International) Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Dickson Concepts (International) had HK$945.8m of debt, an increase on HK$591.4m, over one year. But it also has HK$3.59b in cash to offset that, meaning it has HK$2.65b net cash.

A Look At Dickson Concepts (International)'s Liabilities

The latest balance sheet data shows that Dickson Concepts (International) had liabilities of HK$1.83b due within a year, and liabilities of HK$628.7m falling due after that. Offsetting these obligations, it had cash of HK$3.59b as well as receivables valued at HK$213.0m due within 12 months. So it actually has HK$1.35b more liquid assets than total liabilities.

This luscious liquidity implies that Dickson Concepts (International)'s balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Dickson Concepts (International) boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Dickson Concepts (International)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Dickson Concepts (International) had a loss before interest and tax, and actually shrunk its revenue by 43%, to HK$2.2b. That makes us nervous, to say the least.

So How Risky Is Dickson Concepts (International)?

While Dickson Concepts (International) lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$660m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The next few years will be important as the business matures. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Dickson Concepts (International) (of which 1 is a bit unpleasant!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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