Does Skechers U.S.A (NYSE:SKX) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Skechers U.S.A., Inc. (NYSE:SKX) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Skechers U.S.A

How Much Debt Does Skechers U.S.A Carry?

You can click the graphic below for the historical numbers, but it shows that Skechers U.S.A had US$351.5m of debt in September 2023, down from US$393.4m, one year before. However, its balance sheet shows it holds US$1.16b in cash, so it actually has US$813.0m net cash.

How Strong Is Skechers U.S.A's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Skechers U.S.A had liabilities of US$1.49b due within 12 months and liabilities of US$1.44b due beyond that. Offsetting this, it had US$1.16b in cash and US$994.7m in receivables that were due within 12 months. So its liabilities total US$775.8m more than the combination of its cash and short-term receivables.

Since publicly traded Skechers U.S.A shares are worth a total of US$7.13b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Skechers U.S.A boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Skechers U.S.A grew its EBIT by 34% 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 ultimately the future profitability of the business will decide if Skechers U.S.A can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Skechers U.S.A 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. In the last three years, Skechers U.S.A created free cash flow amounting to 4.8% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While Skechers U.S.A does have more liabilities than liquid assets, it also has net cash of US$813.0m. And we liked the look of last year's 34% year-on-year EBIT growth. So we are not troubled with Skechers U.S.A's debt use. 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 Skechers U.S.A that you should be aware of.

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.