Is Fossil Group (NASDAQ:FOSL) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out 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 Fossil Group had US$193.8m of debt in April 2021, down from US$317.4m, one year before. However, its balance sheet shows it holds US$246.7m in cash, so it actually has US$52.9m net cash.

A Look At Fossil Group's Liabilities

We can see from the most recent balance sheet that Fossil Group had liabilities of US$507.2m falling due within a year, and liabilities of US$433.1m due beyond that. On the other hand, it had cash of US$246.7m and US$175.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$518.1m.

This is a mountain of leverage relative to its market capitalization of US$666.6m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Fossil Group boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Fossil Group improved its EBIT from a last year's loss to a positive US$36m. There's no doubt that we learn most about debt from the balance sheet. But it is Fossil Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Fossil Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Fossil Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although Fossil Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$52.9m. The cherry on top was that in converted 386% of that EBIT to free cash flow, bringing in US$137m. So we are not troubled with Fossil Group's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Fossil Group is showing 3 warning signs in our investment analysis , and 2 of those are a bit unpleasant...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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