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.' 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 Hibbett, Inc. (NASDAQ:HIBB) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Hibbett Carry?
As you can see below, at the end of April 2022, Hibbett had US$20.4m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$23.3m in cash, so it actually has US$2.84m net cash.
How Strong Is Hibbett's Balance Sheet?
The latest balance sheet data shows that Hibbett had liabilities of US$275.8m due within a year, and liabilities of US$223.7m falling due after that. On the other hand, it had cash of US$23.3m and US$13.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$462.4m.
This deficit is considerable relative to its market capitalization of US$595.5m, so it does suggest shareholders should keep an eye on Hibbett's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Hibbett boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Hibbett if management cannot prevent a repeat of the 39% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Hibbett can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Hibbett may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Hibbett produced sturdy free cash flow equating to 61% 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 Hibbett does have more liabilities than liquid assets, it also has net cash of US$2.84m. So although we see some areas for improvement, we're not too worried about Hibbett's balance sheet. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Hibbett you should be aware of, and 1 of them doesn't sit too well with us.
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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