Does DICK'S Sporting Goods (NYSE:DKS) Have A 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.' 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 DICK'S Sporting Goods, Inc. (NYSE:DKS) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for DICK'S Sporting Goods

What Is DICK'S Sporting Goods's Net Debt?

As you can see below, DICK'S Sporting Goods had US$1.48b of debt at April 2023, down from US$1.95b a year prior. But it also has US$1.64b in cash to offset that, meaning it has US$160.1m net cash.

How Strong 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$2.53b due within 12 months and liabilities of US$3.91b due beyond that. Offsetting these obligations, it had cash of US$1.64b as well as receivables valued at US$149.0m due within 12 months. So it has liabilities totalling US$4.64b more than its cash and near-term receivables, combined.

This deficit isn't so bad because DICK'S Sporting Goods is worth a massive US$11.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 25% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. 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. While DICK'S Sporting Goods 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 three years, DICK'S Sporting Goods recorded free cash flow worth 68% 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

While DICK'S Sporting Goods does have more liabilities than liquid assets, it also has net cash of US$160.1m. And it impressed us with free cash flow of US$559m, being 68% of its EBIT. So we are not troubled with DICK'S Sporting Goods's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for DICK'S Sporting Goods (of which 1 makes us a bit uncomfortable!) you should know about.

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.