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These 4 Measures Indicate That DICK'S Sporting Goods (NYSE:DKS) Is Using Debt Reasonably Well

·4-min read

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that DICK'S Sporting Goods, Inc. (NYSE:DKS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for DICK'S Sporting Goods

What Is DICK'S Sporting Goods's Debt?

As you can see below, at the end of April 2022, DICK'S Sporting Goods had US$1.95b of debt, up from US$425.8m a year ago. Click the image for more detail. But it also has US$2.25b in cash to offset that, meaning it has US$303.6m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is DICK'S Sporting Goods' Balance Sheet?

According to the last reported balance sheet, DICK'S Sporting Goods had liabilities of US$2.80b due within 12 months, and liabilities of US$4.22b due beyond 12 months. Offsetting this, it had US$2.25b in cash and US$77.9m in receivables that were due within 12 months. So its liabilities total US$4.70b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because DICK'S Sporting Goods is worth US$8.64b, and thus could probably raise enough capital to shore up 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. While it does have liabilities worth noting, DICK'S Sporting Goods also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that DICK'S Sporting Goods has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. 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. Over the most recent three years, DICK'S Sporting Goods recorded free cash flow worth 80% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While DICK'S Sporting Goods does have more liabilities than liquid assets, it also has net cash of US$303.6m. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in US$798m. So we don't think DICK'S Sporting Goods's use of debt is risky. 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. Be aware that DICK'S Sporting Goods is showing 3 warning signs in our investment analysis , and 2 of those don't sit too well with us...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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