These 4 Measures Indicate That G-III Apparel Group (NASDAQ:GIII) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that G-III Apparel Group, Ltd. (NASDAQ:GIII) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for G-III Apparel Group

What Is G-III Apparel Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that G-III Apparel Group had US$414.0m of debt in July 2024, down from US$466.0m, one year before. But it also has US$414.8m in cash to offset that, meaning it has US$823.0k net cash.

How Strong Is G-III Apparel Group's Balance Sheet?

We can see from the most recent balance sheet that G-III Apparel Group had liabilities of US$546.4m falling due within a year, and liabilities of US$637.2m due beyond that. On the other hand, it had cash of US$414.8m and US$477.5m worth of receivables due within a year. So it has liabilities totalling US$291.4m more than its cash and near-term receivables, combined.

This deficit isn't so bad because G-III Apparel Group is worth US$1.32b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, G-III Apparel Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, G-III Apparel Group grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine G-III Apparel Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While G-III Apparel 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 most recent three years, G-III Apparel Group recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although G-III Apparel 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$823.0k. And it impressed us with its EBIT growth of 44% over the last year. So is G-III Apparel Group's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for G-III Apparel Group (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.