Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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 Duty Free International Limited (SGX:5SO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Duty Free International

How Much Debt Does Duty Free International Carry?

You can click the graphic below for the historical numbers, but it shows that as of November 2019 Duty Free International had RM29.7m of debt, an increase on RM2.91m, over one year. But on the other hand it also has RM356.1m in cash, leading to a RM326.4m net cash position.

A Look At Duty Free International's Liabilities

Zooming in on the latest balance sheet data, we can see that Duty Free International had liabilities of RM168.8m due within 12 months and liabilities of RM89.7m due beyond that. On the other hand, it had cash of RM356.1m and RM85.4m worth of receivables due within a year. So it can boast RM183.0m more liquid assets than total liabilities.

This luscious liquidity implies that Duty Free International's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Duty Free International boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Duty Free International's saving grace is its low debt levels, because its EBIT has tanked 24% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Duty Free International's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.