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. We can see that ANTA Sports Products Limited (HKG:2020) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.
What Is ANTA Sports Products's Net Debt?
As you can see below, at the end of June 2019, ANTA Sports Products had CN¥8.04b of debt, up from CN¥1.24b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥9.17b in cash, so it actually has CN¥1.14b net cash.
A Look At ANTA Sports Products's Liabilities
Zooming in on the latest balance sheet data, we can see that ANTA Sports Products had liabilities of CN¥8.67b due within 12 months and liabilities of CN¥7.69b due beyond that. On the other hand, it had cash of CN¥9.17b and CN¥3.25b worth of receivables due within a year. So it has liabilities totalling CN¥3.94b more than its cash and near-term receivables, combined.
Since publicly traded ANTA Sports Products shares are worth a very impressive total of CN¥181.4b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, ANTA Sports Products also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that ANTA Sports Products has boosted its EBIT by 53%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ANTA Sports Products's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. ANTA Sports Products 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, ANTA Sports Products produced sturdy free cash flow equating to 64% 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.
We could understand if investors are concerned about ANTA Sports Products's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.14b. And we liked the look of last year's 53% year-on-year EBIT growth. So is ANTA Sports Products's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in ANTA Sports Products, you may well want to click here to check an interactive graph of its earnings per share history.
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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