Is Fossil Group (NASDAQ:FOSL) Using Debt In A Risky Way?

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. Importantly, Fossil Group, Inc. (NASDAQ:FOSL) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Fossil Group

What Is Fossil Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of January 2021 Fossil Group had US$225.8m of debt, an increase on US$202.5m, over one year. However, its balance sheet shows it holds US$317.2m in cash, so it actually has US$91.4m net cash.

How Strong Is Fossil Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fossil Group had liabilities of US$558.5m due within 12 months and liabilities of US$479.9m due beyond that. On the other hand, it had cash of US$317.2m and US$275.8m worth of receivables due within a year. So it has liabilities totalling US$445.5m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$648.7m, so it does suggest shareholders should keep an eye on Fossil Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Fossil Group also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Fossil Group's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Fossil Group made a loss at the EBIT level, and saw its revenue drop to US$1.6b, which is a fall of 27%. To be frank that doesn't bode well.

So How Risky Is Fossil Group?

While Fossil Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$91m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. To that end, you should learn about the 4 warning signs we've spotted with Fossil Group (including 1 which is a bit concerning) .

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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