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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for ANTA Sports Products

What Is ANTA Sports Products's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 ANTA Sports Products had CN¥13.8b of debt, an increase on CN¥12.8b, over one year. However, its balance sheet shows it holds CN¥41.3b in cash, so it actually has CN¥27.5b 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¥15.8b due within 12 months and liabilities of CN¥15.1b due beyond that. On the other hand, it had cash of CN¥41.3b and CN¥2.74b worth of receivables due within a year. So it can boast CN¥13.1b more liquid assets than total liabilities.

This surplus suggests that ANTA Sports Products has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

Also good is that ANTA Sports Products grew its EBIT at 20% over the last year, further increasing its ability to manage debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, ANTA Sports Products generated free cash flow amounting to a very robust 99% 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¥27.5b, as well as more liquid assets than liabilities. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in CN¥16b. So we don't think ANTA Sports Products's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - ANTA Sports Products has 1 warning sign we think you should be aware of.

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.