We Think Chico's FAS (NYSE:CHS) Can Stay On Top Of Its 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.' 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. We note that Chico's FAS, Inc. (NYSE:CHS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Chico's FAS

What Is Chico's FAS's Net Debt?

The image below, which you can click on for greater detail, shows that Chico's FAS had debt of US$49.0m at the end of January 2023, a reduction from US$99.0m over a year. However, it does have US$178.1m in cash offsetting this, leading to net cash of US$129.1m.

How Strong Is Chico's FAS' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chico's FAS had liabilities of US$451.2m due within 12 months and liabilities of US$401.0m due beyond that. Offsetting these obligations, it had cash of US$178.1m as well as receivables valued at US$24.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$649.9m.

This is a mountain of leverage relative to its market capitalization of US$695.3m. 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.

Even more impressive was the fact that Chico's FAS grew its EBIT by 105% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. 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 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 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 79% 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$129.1m. And it impressed us with its EBIT growth of 105% over the last year. So we don't have any problem with Chico's FAS's use of debt. 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. To that end, you should be aware of the 2 warning signs we've spotted with Chico's FAS .

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.