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.' 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. We can see that Dickson Concepts (International) Limited (HKG:113) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Dickson Concepts (International)'s Debt?

As you can see below, Dickson Concepts (International) had HK$799.1m of debt at March 2024, down from HK$1.01b a year prior. However, its balance sheet shows it holds HK$4.12b in cash, so it actually has HK$3.33b net cash.

A Look At Dickson Concepts (International)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Dickson Concepts (International) had liabilities of HK$1.38b due within 12 months and liabilities of HK$405.6m due beyond that. Offsetting this, it had HK$4.12b in cash and HK$218.6m in receivables that were due within 12 months. So it can boast HK$2.56b more liquid assets than total liabilities.

This luscious liquidity implies that Dickson Concepts (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. 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.

But the other side of the story is that Dickson Concepts (International) saw its EBIT decline by 2.5% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Dickson Concepts (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.

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. Happily for any shareholders, Dickson Concepts (International) actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that Dickson Concepts (International) has net cash of HK$3.33b and plenty of liquid assets. And it impressed us with free cash flow of HK$423m, being 170% of its EBIT. So we don't think Dickson Concepts (International)'s use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Dickson Concepts (International) (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com