Warren Buffett said: “Volatility is far from synonymous with risk”. It is natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Dixons Carphone plc (LON: DC.) uses the debt. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest review for Dixons Carphone
How much debt does the Carphone Dixons carry?
The image below, which you can click for more details, shows Dixons Carphone owed £ 6.00million at the end of May 2021, a reduction from £ 864.0million over a year. However, he has £ 175.0million in cash offsetting this, leading to a net cash of £ 169.0million.
How strong is Dixons Carphone’s balance sheet?
According to the latest published balance sheet, Dixons Carphone had a liability of £ 2.62bn due within 12 months and a liability of £ 1.88bn due beyond 12 months. On the other hand, he had cash of £ 175.0 million and £ 588.0 million in less than one year receivables. It therefore has liabilities totaling £ 3.74 billion more than its cash and short-term receivables combined.
This deficit casts a shadow over the £ 1.54bn UK company like a towering colossus of mere mortals. We therefore believe that shareholders should watch it closely. After all, Dixons Carphone would likely need a major recapitalization if it were to pay its creditors today. Since Dixons Carphone has more cash than debt, we’re pretty confident that he can handle his debt, despite having a lot of liabilities altogether.
We note that Dixons Carphone has increased its EBIT by 27% over the past year, which should make it easier to repay debt in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Dixons Carphone can strengthen its balance sheet over time. So if you want to see what the professionals are thinking, you might find this free report on analysts’ earnings forecasts Be interesting.
But our last consideration is also important, because a company cannot pay its debts with paper profits; he needs hard cash. Dixons Carphone may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and his capacity. to manage debt. Over the past three years, Dixons Carphone has actually generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
In summary
Although Dixons Carphone’s balance sheet is not particularly strong, due to total liabilities it is clearly positive that it has net cash of £ 169.0million. The icing on the cake was that he converted 153% of that EBIT into free cash flow, bringing in £ 722million. So we have no problem with Dixons Carphone’s use of debt. Even though Dixons Carphone lost money on the bottom line, its positive EBIT suggests the company itself has potential. Then you may want to check how revenues have evolved over the past few years.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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