Health Check: How Prudently Does Skillsoft (NYSE:SKIL) Use 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 Skillsoft Corp. (NYSE:SKIL) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Skillsoft

What Is Skillsoft's Debt?

As you can see below, at the end of October 2022, Skillsoft had US$630.7m of debt, up from US$541.6m a year ago. Click the image for more detail. However, because it has a cash reserve of US$174.7m, its net debt is less, at about US$456.0m.

How Healthy Is Skillsoft's Balance Sheet?

We can see from the most recent balance sheet that Skillsoft had liabilities of US$329.4m falling due within a year, and liabilities of US$692.1m due beyond that. On the other hand, it had cash of US$174.7m and US$102.4m worth of receivables due within a year. So its liabilities total US$744.4m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$238.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Skillsoft would probably need a major re-capitalization if its creditors were to demand repayment. 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 Skillsoft'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.

In the last year Skillsoft wasn't profitable at an EBIT level, but managed to grow its revenue by 87%, to US$841m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Skillsoft managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable US$101m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized US$2.4m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Skillsoft you should be aware of.

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.