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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Foot Locker, Inc. (NYSE:FL) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 Foot Locker
What Is Foot Locker's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Foot Locker had US$102.0m of debt in July 2021, down from US$121.0m, one year before. But on the other hand it also has US$1.85b in cash, leading to a US$1.74b net cash position.
A Look At Foot Locker's Liabilities
The latest balance sheet data shows that Foot Locker had liabilities of US$1.68b due within a year, and liabilities of US$2.56b falling due after that. On the other hand, it had cash of US$1.85b and US$125.0m worth of receivables due within a year. So its liabilities total US$2.27b more than the combination of its cash and short-term receivables.
Foot Locker has a market capitalization of US$4.91b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Foot Locker also has more cash than debt, so we're pretty confident it can manage its debt safely.
Even more impressive was the fact that Foot Locker grew its EBIT by 174% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Foot Locker 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.