The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, NIKE, Inc. (NYSE:NKE) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 NIKE

What Is NIKE's Debt?

As you can see below, NIKE had US$9.02b of debt, at November 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$9.76b in cash, so it actually has US$739.0m net cash.

How Strong Is NIKE's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that NIKE had liabilities of US$11.2b due within 12 months and liabilities of US$12.7b due beyond that. Offsetting these obligations, it had cash of US$9.76b as well as receivables valued at US$5.30b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$8.86b.

Of course, NIKE has a titanic market capitalization of US$116.0b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, NIKE boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, NIKE saw its EBIT drop by 2.4% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 NIKE's ability to maintain a healthy balance sheet going forward. 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. NIKE 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. Over the most recent three years, NIKE recorded free cash flow worth 74% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about NIKE's liabilities, but we can be reassured by the fact it has has net cash of US$739.0m. And it impressed us with free cash flow of US$5.5b, being 74% of its EBIT. So is NIKE's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in NIKE, you may well want to click here to check an interactive graph of its earnings per share history.

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.