ANTA Sports Products (HKG:2020) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, ANTA Sports Products Limited (HKG:2020) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for ANTA Sports Products

What Is ANTA Sports Products's Net Debt?

As you can see below, ANTA Sports Products had CN¥12.2b of debt at June 2021, down from CN¥17.8b a year prior. But it also has CN¥23.5b in cash to offset that, meaning it has CN¥11.3b net cash.

A Look At ANTA Sports Products' Liabilities

Zooming in on the latest balance sheet data, we can see that ANTA Sports Products had liabilities of CN¥10.3b due within 12 months and liabilities of CN¥14.9b due beyond that. Offsetting this, it had CN¥23.5b in cash and CN¥3.29b in receivables that were due within 12 months. So it can boast CN¥1.59b more liquid assets than total liabilities.

Having regard to ANTA Sports Products' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥263.0b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that ANTA Sports Products has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that ANTA Sports Products has boosted its EBIT by 43%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ANTA Sports Products 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. 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 generated free cash flow amounting to a very robust 80% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that ANTA Sports Products has net cash of CN¥11.3b, as well as more liquid assets than liabilities. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in CN¥11b. So is ANTA Sports Products's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for ANTA Sports Products you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.