Is Fossil Group (NASDAQ:FOSL) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Fossil Group, Inc. (NASDAQ:FOSL) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Fossil Group

How Much Debt Does Fossil Group Carry?

The image below, which you can click on for greater detail, shows that Fossil Group had debt of US$175.7m at the end of September 2024, a reduction from US$256.4m over a year. However, because it has a cash reserve of US$106.3m, its net debt is less, at about US$69.4m.

How Healthy Is Fossil Group's Balance Sheet?

The latest balance sheet data shows that Fossil Group had liabilities of US$317.5m due within a year, and liabilities of US$333.0m falling due after that. Offsetting this, it had US$106.3m in cash and US$173.7m in receivables that were due within 12 months. So it has liabilities totalling US$370.5m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$100.5m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Fossil Group would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Fossil Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Fossil Group had a loss before interest and tax, and actually shrunk its revenue by 18%, to US$1.2b. We would much prefer see growth.

Caveat Emptor

Not only did Fossil Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$63m 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 since it is low on liquid assets, and made a loss of US$123m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. For example - Fossil Group has 2 warning signs we think you should be aware of.

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.