Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, DICK'S Sporting Goods, Inc. (NYSE:DKS) does carry debt. But should shareholders be worried about its use of debt?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for DICK'S Sporting Goods
You can click the graphic below for the historical numbers, but it shows that as of July 2022 DICK'S Sporting Goods had US$1.85b of debt, an increase on US$433.5m, over one year. However, it does have US$1.90b in cash offsetting this, leading to net cash of US$45.2m.
According to the last reported balance sheet, DICK'S Sporting Goods had liabilities of US$2.78b due within 12 months, and liabilities of US$4.11b due beyond 12 months. Offsetting this, it had US$1.90b in cash and US$84.4m in receivables that were due within 12 months. So it has liabilities totalling US$4.91b more than its cash and near-term receivables, combined.
DICK'S Sporting Goods has a market capitalization of US$8.95b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, DICK'S Sporting Goods boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, DICK'S Sporting Goods saw its EBIT drop by 2.8% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 DICK'S Sporting Goods 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, a company can only pay off debt with cold hard cash, not accounting profits. While 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 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, DICK'S Sporting Goods produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While DICK'S Sporting Goods does have more liabilities than liquid assets, it also has net cash of US$45.2m. And it impressed us with free cash flow of US$380m, being 72% of its EBIT. So we are not troubled with DICK'S Sporting Goods's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for DICK'S Sporting Goods you should be aware of, and 1 of them is a bit concerning.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
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DICK'S Sporting Goods, Inc., together with its subsidiaries, operates as a sporting goods retailer primarily in the eastern United States.
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.
DICK'S Sporting Goods, Inc., together with its subsidiaries, operates as a sporting goods retailer primarily in the eastern United States.
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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