Is Skillsoft (NYSE:SKIL) Using Too Much Debt?

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 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 can see that Skillsoft Corp. (NYSE:SKIL) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Skillsoft

How Much Debt Does Skillsoft Carry?

The chart below, which you can click on for greater detail, shows that Skillsoft had US$626.1m in debt in July 2023; about the same as the year before. However, because it has a cash reserve of US$147.9m, its net debt is less, at about US$478.2m.

A Look At Skillsoft's Liabilities

According to the last reported balance sheet, Skillsoft had liabilities of US$343.4m due within 12 months, and liabilities of US$671.7m due beyond 12 months. Offsetting this, it had US$147.9m in cash and US$110.5m in receivables that were due within 12 months. So its liabilities total US$756.7m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$199.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Skillsoft would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Skillsoft 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.

In the last year Skillsoft had a loss before interest and tax, and actually shrunk its revenue by 16%, to US$556m. We would much prefer see growth.

Caveat Emptor

While Skillsoft's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$115m 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. But we think that is unlikely, given it is low on liquid assets, and burned through US$21m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Skillsoft that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.