Is ANTA Sports Products (HKG:2020) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that ANTA Sports Products Limited (HKG:2020) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ANTA Sports Products

What Is ANTA Sports Products's Debt?

The chart below, which you can click on for greater detail, shows that ANTA Sports Products had CN¥12.7b in debt in December 2022; about the same as the year before. However, it does have CN¥29.4b in cash offsetting this, leading to net cash of CN¥16.7b.

A Look At ANTA Sports Products' Liabilities

According to the last reported balance sheet, ANTA Sports Products had liabilities of CN¥26.2b due within 12 months, and liabilities of CN¥5.15b due beyond 12 months. Offsetting this, it had CN¥29.4b in cash and CN¥3.14b in receivables that were due within 12 months. So it can boast CN¥1.18b more liquid assets than total liabilities.

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¥265.1b company is struggling for cash, we still think it's worth monitoring its 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.

ANTA Sports Products's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 88% 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

While it is always sensible to investigate a company's debt, in this case ANTA Sports Products has CN¥16.7b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in CN¥10b. So is ANTA Sports Products's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in ANTA Sports Products would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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.