DICK’S Sporting Goods (NYSE:DKS) seems to be using debt quite wisely
Warren Buffett said: “Volatility is far from synonymous with risk. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Dick’s Sporting Goods, Inc. (NYSE:DKS) uses debt. But does this debt worry shareholders?
When is debt dangerous?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.
How much debt does DICK’S Sporting Goods have?
The image below, which you can click on for more details, shows that as of July 2022, DICK’S Sporting Goods had $1.85 billion in debt, up from $433.5 million in one year. But on the other hand, he also has $1.90 billion in cash, resulting in a net cash position of $45.2 million.
A Look at DICK’s Sporting Goods Responsibilities
We can see from the most recent balance sheet that DICK’S Sporting Goods had liabilities of US$2.78 billion due within one year, and liabilities of US$4.11 billion due beyond . As compensation for these obligations, it had cash of US$1.90 billion as well as receivables valued at US$84.4 million due within 12 months. It therefore has liabilities totaling $4.91 billion more than its cash and short-term receivables, combined.
DICK’S Sporting Goods has a market capitalization of $8.71 billion, so it could very likely raise funds to improve its balance sheet, should the need arise. But it is clear that it is essential to examine closely whether it can manage its debt without dilution. Despite its notable liabilities, DICK’S Sporting Goods has a net cash position, so it’s fair to say that it doesn’t have a lot of debt!
But the flip side is that DICK’S Sporting Goods has seen its EBIT drop 3.6% over the past year. If earnings continue to decline at this rate, the company could find it increasingly difficult to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine DICK’S Sporting Goods’ ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, while the taxman may love accounting profits, lenders only accept cash. DICK’S Sporting Goods may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and tax (EBIT) into free cash flow, as this will influence both its needs and its ability to manage debt. Over the past three years, DICK’S Sporting Goods has produced strong free cash flow equivalent to 72% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.
Although DICK’S Sporting Goods’ balance sheet is not particularly strong, due to total liabilities, it is clearly positive to see that it has a net cash position of $45.2 million. And it impressed us with free cash flow of $380 million, or 72% of its EBIT. We are therefore not concerned about the use of DICK’S Sporting Goods debt. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 3 warning signs with DICK’S Sporting Goods (at least 1 which is concerning), and understanding them should be part of your investment process.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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