Is Chico's FAS (NYSE:CHS) 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.' 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. Importantly, Chico's FAS, Inc. (NYSE:CHS) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Chico's FAS

What Is Chico's FAS's Debt?

As you can see below, Chico's FAS had US$99.0m of debt at April 2022, down from US$149.0m a year prior. But on the other hand it also has US$104.1m in cash, leading to a US$5.13m net cash position.

How Healthy Is Chico's FAS' Balance Sheet?

According to the last reported balance sheet, Chico's FAS had liabilities of US$450.7m due within 12 months, and liabilities of US$457.1m due beyond 12 months. On the other hand, it had cash of US$104.1m and US$12.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$791.0m.

Given this deficit is actually higher than the company's market capitalization of US$688.3m, we think shareholders really should watch Chico's FAS's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Chico's FAS boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

It was also good to see that despite losing money on the EBIT line last year, Chico's FAS turned things around in the last 12 months, delivering and EBIT of US$120m. 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 Chico's FAS can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Chico's FAS 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. Looking at the most recent year, Chico's FAS recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While Chico's FAS does have more liabilities than liquid assets, it also has net cash of US$5.13m. So although we see some areas for improvement, we're not too worried about Chico's FAS's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Chico's FAS , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.