DICK'S Sporting Goods (NYSE:DKS) Has A Pretty Healthy Balance Sheet

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 DICK'S Sporting Goods, Inc. (NYSE:DKS) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for DICK'S Sporting Goods

What Is DICK'S Sporting Goods's Debt?

You can click the graphic below for the historical numbers, but it shows that DICK'S Sporting Goods had US$1.48b of debt in July 2023, down from US$1.85b, one year before. But it also has US$1.90b in cash to offset that, meaning it has US$419.1m net cash.

How Healthy Is DICK'S Sporting Goods' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DICK'S Sporting Goods had liabilities of US$2.78b due within 12 months and liabilities of US$3.94b due beyond that. On the other hand, it had cash of US$1.90b and US$153.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$4.66b.

DICK'S Sporting Goods has a market capitalization of US$8.89b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, DICK'S Sporting Goods also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact DICK'S Sporting Goods's saving grace is its low debt levels, because its EBIT has tanked 24% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 DICK'S Sporting Goods'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. DICK'S Sporting Goods 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. During the last three years, DICK'S Sporting Goods produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While DICK'S Sporting Goods does have more liabilities than liquid assets, it also has net cash of US$419.1m. So we are not troubled with DICK'S Sporting Goods's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with DICK'S Sporting Goods , and understanding them should be part of your investment process.

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.