These 4 Measures Indicate That Chico's FAS (NYSE:CHS) Is Using Debt Reasonably Well

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 Chico's FAS, Inc. (NYSE:CHS) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Chico's FAS

What Is Chico's FAS's Debt?

You can click the graphic below for the historical numbers, but it shows that Chico's FAS had US$24.0m of debt in April 2023, down from US$99.0m, one year before. However, its balance sheet shows it holds US$131.0m in cash, so it actually has US$107.0m net cash.

How Strong Is Chico's FAS' Balance Sheet?

According to the last reported balance sheet, Chico's FAS had liabilities of US$429.0m due within 12 months, and liabilities of US$392.3m due beyond 12 months. On the other hand, it had cash of US$131.0m and US$9.20m worth of receivables due within a year. So it has liabilities totalling US$681.0m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$681.5m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Chico's FAS also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Chico's FAS grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. 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 Chico's FAS's ability to maintain a healthy balance sheet going forward. 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 Chico's FAS 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 most recent two years, Chico's FAS recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Chico's FAS'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$107.0m. And it impressed us with its EBIT growth of 23% over the last year. So we don't have any problem with Chico's FAS's use of debt. We'd be motivated to research the stock further if we found out that Chico's FAS insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.