Howard Marks put it nicely when he said that instead of worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every practical investor I know is concerned about.” , worries.” When we think about how risky a business is, we always like to look at the use of debt, as over-indebtedness can lead to bankruptcy. As with many other companies DICK’S Sporting Goods, Inc. (NYSE:DKS) leverages debt. But the real question is whether that debt makes the company risky.
When is debt a problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it’s at their mercy. If things get really bad, lenders can take control of the deal. However, a more common (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to get the debt under control. By replacing dilution, however, debt can be an extremely good tool for companies that need capital to invest in growth with high returns. When thinking about a company’s use of debt, let’s first consider cash and debt together.
Check out our latest analysis for DICK’S sporting goods
What’s the fault of DICK’S Sporting Goods?
As you can see below, DICK’S Sporting Goods had $1.93 billion in debt at the end of January 2022, up from $418.5 million a year earlier. Click on the picture for more details. But it also has $2.64 billion in cash to offset this, meaning it has $712.5 million in net cash.
NYSE:DKS Debt to Equity History April 18, 2022
A look at DICK’s Sporting Goods liability
If we take a closer look at the latest balance sheet data, we can see that DICK’S Sporting Goods had $2.71 billion in liabilities. Against those liabilities, the company had $2.64 billion in cash and accounts receivable worth $70.2 million due within 12 months. Therefore, its liabilities exceed the sum of its cash and (short-term) receivables by $4.23 billion.
DICK’s Sporting Goods has a market cap of $8.40 billion, so the company could very likely raise cash to improve its balance sheet if the need arose. Still, it’s worth taking a close look at debt repayment ability. Despite its notable liabilities, DICK’S Sporting Goods has net cash, so it’s fair to say it doesn’t have a heavy debt load!
Better still, DICK’S Sporting Goods increased its EBIT by 124% last year, which is an impressive improvement. If this growth is sustained, debt will become even more manageable in the coming years. The balance sheet is clearly the area to focus on when analyzing debt. But it is primarily future earnings that will determine DICK’S Sporting Goods’ ability to maintain a healthy balance sheet well into the future. So if you want to see what the experts think, you might be interested in this free report on analyst earnings forecasts.
Finally, while the helmsman may love book profits, lenders only accept cold, hard cash. Although DICK’S Sporting Goods has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and taxes (EBIT) into free cash flow to understand how quickly it’s building (or eroding) it. . cash balance. For the past three years, DICK’S Sporting Goods has generated free cash flow at a very robust 83% of its EBIT, more than we expected. That positions it well to pay down debt when that is desirable.
Although DICK’S Sporting Goods’ balance sheet isn’t particularly strong given its overall debt, it’s clearly a positive to see the company has net cash of $712.5 million. The icing on the cake was that 83% of that EBIT was converted into free cash flow, which brought in $1.3 billion. So is DICK’S Sporting Goods indebtedness a risk? It doesn’t seem like it to us. When analyzing debt, the balance sheet is the obvious place to start. But ultimately, any business can have off-balance-sheet risks. We have identified 3 warning signs with DICK’S Sporting Goods (at least 1, which makes us a little uncomfortable) and understanding these products should be part of your investment process.
At the end of the day, it’s often better to focus on companies that are free of net debt. You can access our dedicated list of such companies (all with a track record of earnings growth). It’s free.
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