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. Importantly, NIKE, Inc. (NYSE:NKE) does carry debt. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for NIKE
What Is NIKE's Debt?
You can click the graphic below for the historical numbers, but it shows that NIKE had US$8.93b of debt in May 2023, down from US$9.43b, one year before. However, it does have US$10.7b in cash offsetting this, leading to net cash of US$1.74b.
A Look At NIKE's Liabilities
According to the last reported balance sheet, NIKE had liabilities of US$9.26b due within 12 months, and liabilities of US$14.3b due beyond 12 months. Offsetting these obligations, it had cash of US$10.7b as well as receivables valued at US$4.13b due within 12 months. So its liabilities total US$8.72b more than the combination of its cash and short-term receivables.
Of course, NIKE has a titanic market capitalization of US$160.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, NIKE also has more cash than debt, so we're pretty confident it can manage its debt safely.
On the other hand, NIKE's EBIT dived 11%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine NIKE'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, a company can only pay off debt with cold hard cash, not accounting profits. While NIKE 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, NIKE produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that NIKE has US$1.74b in net cash. And it impressed us with free cash flow of US$3.8b, being 72% of its EBIT. So we are not troubled with NIKE's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of NIKE's earnings per share history for free.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
About NYSE:NKE
NIKE
Engages in the design, development, marketing, and sale of athletic footwear, apparel, equipment, accessories, and services worldwide.
Excellent balance sheet established dividend payer.