Here's Why Skechers U.S.A (NYSE:SKX) Can Manage Its Debt Responsibly

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.' 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. 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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.

See our latest analysis for Skechers U.S.A

What Is Skechers U.S.A's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Skechers U.S.A had US$341.6m of debt in December 2021, down from US$735.0m, one year before. However, it does have US$894.9m in cash offsetting this, leading to net cash of US$553.3m.

How Healthy 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$1.45b due within 12 months and liabilities of US$1.50b due beyond that. Offsetting this, it had US$894.9m in cash and US$812.8m in receivables that were due within 12 months. So it has liabilities totalling US$1.24b more than its cash and near-term receivables, combined.

Of course, Skechers U.S.A has a market capitalization of US$6.25b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Skechers U.S.A also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Skechers U.S.A grew its EBIT by 347% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Skechers U.S.A'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 9.1% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While Skechers U.S.A does have more liabilities than liquid assets, it also has net cash of US$553.3m. And it impressed us with its EBIT growth of 347% over the last year. So we are not troubled with Skechers U.S.A's debt use. 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 instance, we've identified 3 warning signs for Skechers U.S.A (2 shouldn't be ignored) 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.