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

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.' 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. As with many other companies ANTA Sports Products Limited (HKG:2020) makes use of debt. But should shareholders be worried about its use of debt?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for ANTA Sports Products

What Is ANTA Sports Products's Debt?

As you can see below, ANTA Sports Products had CN¥13.2b of debt at December 2021, down from CN¥14.4b a year prior. However, its balance sheet shows it holds CN¥26.9b in cash, so it actually has CN¥13.7b net cash.

How Strong Is ANTA Sports Products' Balance Sheet?

According to the last reported balance sheet, ANTA Sports Products had liabilities of CN¥15.9b due within 12 months, and liabilities of CN¥15.1b due beyond 12 months. Offsetting these obligations, it had cash of CN¥26.9b as well as receivables valued at CN¥3.37b due within 12 months. So its liabilities total CN¥739.0m more than the combination of its cash and short-term receivables.

This state of affairs indicates that ANTA Sports Products' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥209.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

Also positive, ANTA Sports Products grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While ANTA Sports Products 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, ANTA Sports Products recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

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¥13.7b. And it impressed us with free cash flow of CN¥10b, being 82% of its EBIT. So is ANTA Sports Products's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with ANTA Sports Products , and understanding them should be part of your investment process.

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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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.