Yahoo Finance We Think Hibbett Sports (NASDAQ:HIBB) Can Stay On Top Of Its Debt
Warren Buffett famously said, '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 should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Hibbett Sports
What Is Hibbett Sports's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of November 2019 Hibbett Sports had US$8.00m of debt, an increase on US$25.0, over one year. However, its balance sheet shows it holds US$77.4m in cash, so it actually has US$69.4m net cash.
A Look At Hibbett Sports's Liabilities
According to the last reported balance sheet, Hibbett Sports had liabilities of US$234.7m due within 12 months, and liabilities of US$195.0m due beyond 12 months. Offsetting this, it had US$77.4m in cash and US$6.73m in receivables that were due within 12 months. So it has liabilities totalling US$345.6m more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of US$447.9m. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Hibbett Sports boasts net cash, so it's fair to say it does not have a heavy debt load!
Also positive, Hibbett Sports grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hibbett Sports can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Hibbett Sports 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. Happily for any shareholders, Hibbett Sports actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
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$69.4m. The cherry on top was that in converted 133% of that EBIT to free cash flow, bringing in US$81m. So is Hibbett Sports's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Hibbett Sports that you should be aware of before investing here.
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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