Is Skechers U.S.A (NYSE:SKX) 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. We can see that Skechers U.S.A., Inc. (NYSE:SKX) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for Skechers U.S.A

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

As you can see below, Skechers U.S.A had US$374.3m of debt at March 2022, down from US$779.7m a year prior. But it also has US$694.8m in cash to offset that, meaning it has US$320.6m net cash.

A Look At Skechers U.S.A's Liabilities

The latest balance sheet data shows that Skechers U.S.A had liabilities of US$1.41b due within a year, and liabilities of US$1.47b falling due after that. Offsetting these obligations, it had cash of US$694.8m as well as receivables valued at US$1.08b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.10b.

Skechers U.S.A has a market capitalization of US$5.35b, so it could very likely raise cash to ameliorate 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, Skechers U.S.A boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Skechers U.S.A grew its EBIT by 150% over twelve months. That boost will make it even easier to pay down debt going forward. 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 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 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. Over the last three years, Skechers U.S.A recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While Skechers U.S.A does have more liabilities than liquid assets, it also has net cash of US$320.6m. And we liked the look of last year's 150% year-on-year EBIT growth. So we don't have any problem with Skechers U.S.A's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Skechers U.S.A is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.