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.' 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 can see that ANTA Sports Products Limited (HKG:2020) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is ANTA Sports Products's Net Debt?

As you can see below, at the end of June 2024, ANTA Sports Products had CN¥15.4b of debt, up from CN¥13.8b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥30.2b in cash, so it actually has CN¥14.7b net cash.

How Strong Is ANTA Sports Products' Balance Sheet?

According to the last reported balance sheet, ANTA Sports Products had liabilities of CN¥27.4b due within 12 months, and liabilities of CN¥8.20b due beyond 12 months. Offsetting this, it had CN¥30.2b in cash and CN¥3.42b in receivables that were due within 12 months. So its liabilities total CN¥1.95b more than the combination of its cash and short-term receivables.

Having regard to ANTA Sports Products' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥210.1b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, ANTA Sports Products also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that ANTA Sports Products has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. 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 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. Happily for any shareholders, ANTA Sports Products 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

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¥14.7b. The cherry on top was that in converted 101% of that EBIT to free cash flow, bringing in CN¥16b. So we don't think ANTA Sports Products's use of debt is risky. Another factor that would give us confidence in ANTA Sports Products would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

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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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.