These 4 Measures Indicate That Dillard's (NYSE:DDS) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Dillard's, Inc. (NYSE:DDS) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Dillard's

What Is Dillard's's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Dillard's had US$521.4m of debt in January 2023, down from US$566.0m, one year before. However, it does have US$799.2m in cash offsetting this, leading to net cash of US$277.9m.

How Strong Is Dillard's' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dillard's had liabilities of US$859.0m due within 12 months and liabilities of US$871.6m due beyond that. On the other hand, it had cash of US$799.2m and US$57.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$873.5m.

Of course, Dillard's has a market capitalization of US$4.83b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Dillard's boasts net cash, so it's fair to say it does not have a heavy debt load!

While Dillard's doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dillard's 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Dillard's has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last two years, Dillard's generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While Dillard's does have more liabilities than liquid assets, it also has net cash of US$277.9m. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in US$828m. So is Dillard's's debt a risk? It doesn't seem so to us. 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 1 warning sign for Dillard's you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.