Yahoo Finance Here's Why Foot Locker (NYSE:FL) Can Manage Its Debt Responsibly
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Foot Locker, Inc. (NYSE:FL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
Check out our latest analysis for Foot Locker
What Is Foot Locker's Debt?
As you can see below, at the end of April 2022, Foot Locker had US$450.0m of debt, up from US$101.0m a year ago. Click the image for more detail. But it also has US$551.0m in cash to offset that, meaning it has US$101.0m net cash.
How Strong Is Foot Locker's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Foot Locker had liabilities of US$1.56b due within 12 months and liabilities of US$3.11b due beyond that. Offsetting this, it had US$551.0m in cash and US$136.0m in receivables that were due within 12 months. So its liabilities total US$3.98b more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's US$3.16b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Foot Locker boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.
In addition to that, we're happy to report that Foot Locker has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Foot Locker 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Foot Locker 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, Foot Locker generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
Summing up
Although Foot Locker'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$101.0m. And it impressed us with free cash flow of US$457m, being 97% of its EBIT. So we don't have any problem with Foot Locker's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Foot Locker (1 is potentially serious) you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
