We Think ANTA Sports Products (HKG:2020) Can Manage Its Debt With Ease

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.' 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 the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View 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.

How Healthy Is ANTA Sports Products' Balance Sheet?

The latest balance sheet data shows that ANTA Sports Products had liabilities of CN¥15.8b due within a year, and liabilities of CN¥15.1b falling due after that. Offsetting this, it had CN¥41.3b in cash and CN¥2.74b in receivables that were due within 12 months. So it actually has CN¥13.1b more liquid assets than total liabilities.

This short term liquidity is a sign that ANTA Sports Products could probably pay off its debt with ease, as its balance sheet is far from stretched. 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.

And we also note warmly that ANTA Sports Products grew its EBIT by 20% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 99% 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¥27.5b in net cash and a decent-looking balance sheet. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for ANTA Sports Products that 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.