Health Check: How Prudently Does Sportsman's Warehouse Holdings (NASDAQ:SPWH) Use Debt?

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.' 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 Sportsman's Warehouse Holdings, Inc. (NASDAQ:SPWH) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sportsman's Warehouse Holdings

What Is Sportsman's Warehouse Holdings's Debt?

The image below, which you can click on for greater detail, shows that at May 2024 Sportsman's Warehouse Holdings had debt of US$177.5m, up from US$166.3m in one year. Net debt is about the same, since the it doesn't have much cash.

A Look At Sportsman's Warehouse Holdings' Liabilities

According to the last reported balance sheet, Sportsman's Warehouse Holdings had liabilities of US$368.0m due within 12 months, and liabilities of US$314.9m due beyond 12 months. On the other hand, it had cash of US$2.17m and US$2.10m worth of receivables due within a year. So it has liabilities totalling US$678.6m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$73.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Sportsman's Warehouse Holdings would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sportsman's Warehouse Holdings'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.

In the last year Sportsman's Warehouse Holdings had a loss before interest and tax, and actually shrunk its revenue by 6.7%, to US$1.3b. We would much prefer see growth.

Caveat Emptor

Importantly, Sportsman's Warehouse Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$21m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the fact is that it incinerated US$5.8m of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So is this a high risk stock? We think so, and we'd avoid it. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Sportsman's Warehouse Holdings , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.