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

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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 Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Debt?

As you can see below, Dickson Concepts (International) had HK$1.01b of debt at March 2023, down from HK$1.12b a year prior. However, it does have HK$3.55b in cash offsetting this, leading to net cash of HK$2.54b.

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

We can see from the most recent balance sheet that Dickson Concepts (International) had liabilities of HK$1.69b falling due within a year, and liabilities of HK$521.3m due beyond that. On the other hand, it had cash of HK$3.55b and HK$146.8m worth of receivables due within a year. So it can boast HK$1.48b more liquid assets than total liabilities.

This excess liquidity is a great indication that Dickson Concepts (International)'s balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Dickson Concepts (International) has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Dickson Concepts (International) has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Dickson Concepts (International) will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Dickson Concepts (International) 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. Over the last three years, Dickson Concepts (International) actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Dickson Concepts (International) has HK$2.54b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of HK$448m, being 159% of its EBIT. At the end of the day we're not concerned about Dickson Concepts (International)'s debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Dickson Concepts (International) (1 is potentially serious!) that you should be aware of before investing here.

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. 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.