Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that ANTA Sports Products Limited (HKG:2020) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for ANTA Sports Products

What Is ANTA Sports Products's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 ANTA Sports Products had CN¥12.8b of debt, an increase on CN¥12.2b, over one year. But on the other hand it also has CN¥26.3b in cash, leading to a CN¥13.6b net cash position.

A Look At ANTA Sports Products' Liabilities

According to the last reported balance sheet, ANTA Sports Products had liabilities of CN¥23.7b due within 12 months, and liabilities of CN¥5.75b due beyond 12 months. Offsetting these obligations, it had cash of CN¥26.3b as well as receivables valued at CN¥3.12b due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that ANTA Sports Products' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥204.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, ANTA Sports Products boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, ANTA Sports Products 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ANTA Sports Products'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While ANTA Sports Products 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. Over the last three years, ANTA Sports Products recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about ANTA Sports Products's liabilities, but we can be reassured by the fact it has has net cash of CN¥13.6b. And it impressed us with free cash flow of CN¥8.7b, being 82% of its EBIT. So we don't think ANTA Sports Products's use of debt is risky. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that ANTA Sports Products insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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.