These 4 Measures Indicate That DICK'S Sporting Goods (NYSE:DKS) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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 DICK'S Sporting Goods

How Much Debt Does DICK'S Sporting Goods Carry?

As you can see below, DICK'S Sporting Goods had US$1.48b of debt, at May 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$1.65b in cash, so it actually has US$165.6m 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$3.02b due within 12 months and liabilities of US$4.00b due beyond that. On the other hand, it had cash of US$1.65b and US$161.6m worth of receivables due within a year. So it has liabilities totalling US$5.21b 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$19.3b, 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.

On the other hand, DICK'S Sporting Goods saw its EBIT drop by 4.9% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 53% 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$165.6m. So we are not troubled with DICK'S Sporting Goods's debt use. We'd be motivated to research the stock further if we found out that DICK'S Sporting Goods 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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