Is DICK'S Sporting Goods (NYSE:DKS) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 DICK'S Sporting Goods, Inc. (NYSE:DKS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Debt?

As you can see below, DICK'S Sporting Goods had US$1.48b of debt, at February 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has US$1.80b in cash to offset that, meaning it has US$318.0m net cash.

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

According to the last reported balance sheet, DICK'S Sporting Goods had liabilities of US$2.75b due within 12 months, and liabilities of US$3.94b due beyond 12 months. Offsetting these obligations, it had cash of US$1.80b as well as receivables valued at US$119.0m due within 12 months. So it has liabilities totalling US$4.77b 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$15.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

But the other side of the story is that DICK'S Sporting Goods saw its EBIT decline by 8.2% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 DICK'S Sporting Goods can strengthen its balance sheet over time. 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. 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 57% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although DICK'S Sporting Goods'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$318.0m. So we don't have any problem with DICK'S Sporting Goods'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for DICK'S Sporting Goods you should know about.

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.