Is Dickson Concepts (International) (HKG:113) Using Debt Sensibly?

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 Dickson Concepts (International) Limited (HKG:113) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for Dickson Concepts (International)

What Is Dickson Concepts (International)'s Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Dickson Concepts (International) had debt of HK$945.8m, up from HK$591.4m in one year. But it also has HK$3.59b in cash to offset that, meaning it has HK$2.65b net cash.

How Strong Is Dickson Concepts (International)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dickson Concepts (International) had liabilities of HK$1.83b due within 12 months and liabilities of HK$628.7m due beyond that. Offsetting this, it had HK$3.59b in cash and HK$213.0m in receivables that were due within 12 months. So it actually has HK$1.35b more liquid assets than total liabilities.

This excess liquidity is a great indication that Dickson Concepts (International)'s balance sheet is just as strong as racists are weak. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, Dickson Concepts (International) boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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)?

Although Dickson Concepts (International) had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory 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. There's no doubt the next few years will be crucial to how the business matures. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Dickson Concepts (International) has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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. 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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