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.' 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. As with many other companies Ross Stores, Inc. (NASDAQ:ROST) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Ross Stores Carry?
The chart below, which you can click on for greater detail, shows that Ross Stores had US$2.52b in debt in October 2021; about the same as the year before. However, its balance sheet shows it holds US$5.26b in cash, so it actually has US$2.74b net cash.
How Strong Is Ross Stores' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Ross Stores had liabilities of US$4.48b due within 12 months and liabilities of US$5.46b due beyond that. On the other hand, it had cash of US$5.26b and US$158.8m worth of receivables due within a year. So its liabilities total US$4.51b more than the combination of its cash and short-term receivables.
Since publicly traded Ross Stores shares are worth a very impressive total of US$38.7b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Ross Stores boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Ross Stores grew its EBIT by 556% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Ross Stores 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 Ross Stores 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 last three years, Ross Stores actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While Ross Stores does have more liabilities than liquid assets, it also has net cash of US$2.74b. The cherry on top was that in converted 102% of that EBIT to free cash flow, bringing in US$1.5b. So we don't think Ross Stores's use of debt is risky. Another factor that would give us confidence in Ross Stores would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.