The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. We can see that ANTA Sports Products Limited (HKG:2020) does use debt in its business. But the real question is whether this debt is making the company risky.
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for ANTA Sports Products
You can click the graphic below for the historical numbers, but it shows that as of June 2022 ANTA Sports Products had CN¥12.8b of debt, an increase on CN¥12.2b, over one year. However, it does have CN¥26.3b in cash offsetting this, leading to net cash of CN¥13.6b.
We can see from the most recent balance sheet that ANTA Sports Products had liabilities of CN¥23.7b falling due within a year, and liabilities of CN¥5.75b due beyond that. Offsetting these obligations, it had cash of CN¥26.3b as well as receivables valued at CN¥3.12b due within 12 months. So these liquid assets roughly match the total liabilities.
Having regard to ANTA Sports Products' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥220.9b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, ANTA Sports Products boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, ANTA Sports Products saw its EBIT drop by 4.9% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if ANTA Sports Products can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While ANTA Sports Products has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, ANTA Sports Products generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
While it is always sensible to look at a company's total liabilities, it is very reassuring that ANTA Sports Products has CN¥13.6b in net cash. And it impressed us with free cash flow of CN¥8.7b, being 82% of its EBIT. So we don't think ANTA Sports Products's use of debt is risky. We'd be motivated to research the stock further if we found out that ANTA Sports Products insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Find out whether ANTA Sports Products is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.
ANTA Sports Products Limited, together with its subsidiaries, designs, develops, manufactures, and markets sporting footwear, apparel, and accessories worldwide.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Excellent balance sheet and good value.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.
ANTA Sports Products Limited, together with its subsidiaries, designs, develops, manufactures, and markets sporting footwear, apparel, and accessories worldwide.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Excellent balance sheet and good value.
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