David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, DXC Technology Company (NYSE:DXC) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is DXC Technology's Net Debt?
As you can see below, DXC Technology had US$4.09b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had US$1.69b in cash, and so its net debt is US$2.40b.
NYSE:DXC Debt to Equity History March 9th 2024
How Strong Is DXC Technology's Balance Sheet?
We can see from the most recent balance sheet that DXC Technology had liabilities of US$4.96b falling due within a year, and liabilities of US$6.57b due beyond that. Offsetting these obligations, it had cash of US$1.69b as well as receivables valued at US$3.13b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$6.70b.
The deficiency here weighs heavily on the US$3.81b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, DXC Technology would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine DXC Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, DXC Technology made a loss at the EBIT level, and saw its revenue drop to US$14b, which is a fall of 6.6%. We would much prefer see growth.
Caveat Emptor
Over the last twelve months DXC Technology produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$790m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of US$465m. And until that time we think this is a risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting DXC Technology insider transactions.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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