Yahoo Finance Does Hibbett Sports (NASDAQ:HIBB) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Hibbett Sports, Inc. (NASDAQ:HIBB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Hibbett Sports
What Is Hibbett Sports's Net Debt?
The image below, which you can click on for greater detail, shows that at May 2020 Hibbett Sports had debt of US$50.0m, up from US$26.0m in one year. But it also has US$106.7m in cash to offset that, meaning it has US$56.7m net cash.
How Strong Is Hibbett Sports's Balance Sheet?
According to the last reported balance sheet, Hibbett Sports had liabilities of US$243.6m due within 12 months, and liabilities of US$190.4m due beyond 12 months. Offsetting this, it had US$106.7m in cash and US$20.0m in receivables that were due within 12 months. So it has liabilities totalling US$307.3m more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of US$487.2m, so it does suggest shareholders should keep an eye on Hibbett Sports's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Hibbett Sports also has more cash than debt, so we're pretty confident it can manage its debt safely.
It is just as well that Hibbett Sports's load is not too heavy, because its EBIT was down 34% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hibbett Sports'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hibbett Sports 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. Happily for any shareholders, Hibbett Sports actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
Although Hibbett Sports'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$56.7m. The cherry on top was that in converted 112% of that EBIT to free cash flow, bringing in US$5.2m. So we are not troubled with Hibbett Sports's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Hibbett Sports you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
This article by Simply Wall St is general in nature. 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.
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