Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that Dillard’s, Inc. (NYSE:DDS) has debt on its balance sheet. But should shareholders worry about its use of debt?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.
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What is Dillard’s debt?
The graph below, which you can click on for more details, shows that Dillard had $566.1 million in debt as of July 2022; about the same as the previous year. But he also has $566.9 million in cash to offset that, which means he has $762.0,000 in net cash.
How healthy is Dillard’s balance sheet?
According to the last published balance sheet, Dillard’s had liabilities of $946.0 million due within 12 months and liabilities of $826.6 million due beyond 12 months. On the other hand, it had liquidities of 566.9 million dollars and 76.1 million dollars of accounts receivable within one year. Thus, its liabilities outweigh the sum of its cash and (current) receivables of US$1.13 billion.
While that might sound like a lot, it’s not that bad since Dillard’s has a market capitalization of US$4.81 billion, so it could probably bolster its balance sheet by raising capital if needed. However, it is always worth taking a close look at its ability to repay debt. While he has liabilities worth noting, Dillard also has more cash than debt, so we’re pretty confident he can manage his debt safely.
What is even more impressive is that Dillard’s increased its EBIT by 107% year-over-year. This boost will make it even easier to pay off debt in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But it’s future earnings, more than anything, that will determine Dillard’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Dillard’s may have net cash on the balance sheet, but it’s always interesting to look at how well the business converts its earnings before interest and tax (EBIT) into free cash flow, as this will influence both its need and its ability. to manage debt. Over the past two years, Dillard has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Although Dillard’s balance sheet is not particularly strong, due to total liabilities, it is clearly positive to see that he has a net cash position of US$762,000. And it impressed us with free cash flow of $943 million, or 106% of its EBIT. So we don’t think Dillard’s use of debt is risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. For example, we found 1 warning sign for Dillard’s which you should be aware of before investing here.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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Find out if Dillard’s is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.