Ross Stores (NASDAQ:ROST) Seems To Use Debt Quite Sensibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Ross Stores, Inc. (NASDAQ:ROST) makes use of 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. 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.

Check out our latest analysis for Ross Stores

How Much Debt Does Ross Stores Carry?

As you can see below, Ross Stores had US$2.46b of debt, at April 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$4.42b in cash, leading to a US$1.96b net cash position.

How Healthy Is Ross Stores' Balance Sheet?

According to the last reported balance sheet, Ross Stores had liabilities of US$3.78b due within 12 months, and liabilities of US$5.53b due beyond 12 months. Offsetting these obligations, it had cash of US$4.42b as well as receivables valued at US$170.8m due within 12 months. So it has liabilities totalling US$4.72b more than its cash and near-term receivables, combined.

Since publicly traded Ross Stores shares are worth a very impressive total of US$38.2b, it seems unlikely that this level of liabilities would be a major threat. 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, Ross Stores also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Ross Stores's EBIT dived 18%, 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 ultimately the future profitability of the business will decide if Ross Stores 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. Ross Stores may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Ross Stores recorded free cash flow worth a fulsome 93% 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

Although Ross Stores's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$1.96b. The cherry on top was that in converted 93% of that EBIT to free cash flow, bringing in US$1.8b. So we are not troubled with Ross Stores's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Ross Stores .

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.