Is Duty Free International (SGX:5SO) Weighed On By Its Debt Load?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Duty Free International Limited (SGX:5SO) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Duty Free International

What Is Duty Free International's Net Debt?

As you can see below, Duty Free International had RM6.25m of debt at February 2021, down from RM34.3m a year prior. But on the other hand it also has RM200.7m in cash, leading to a RM194.4m net cash position.

How Healthy Is Duty Free International's Balance Sheet?

We can see from the most recent balance sheet that Duty Free International had liabilities of RM49.4m falling due within a year, and liabilities of RM94.7m due beyond that. Offsetting this, it had RM200.7m in cash and RM57.5m in receivables that were due within 12 months. So it actually has RM114.1m more liquid assets than total liabilities.

This luscious liquidity implies that Duty Free International's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Duty Free International boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Duty Free International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Duty Free International made a loss at the EBIT level, and saw its revenue drop to RM223m, which is a fall of 64%. That makes us nervous, to say the least.

So How Risky Is Duty Free International?

While Duty Free International lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM14m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Duty Free International (of which 1 is potentially serious!) you should know about.

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. 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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