Is Skechers U.S.A (NYSE:SKX) Using Too Much Debt?

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. As with many other companies Skechers U.S.A., Inc. (NYSE:SKX) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

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

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

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Skechers U.S.A had US$628.9m of debt, an increase on US$351.5m, over one year. But on the other hand it also has US$1.47b in cash, leading to a US$839.0m net cash position.

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

We can see from the most recent balance sheet that Skechers U.S.A had liabilities of US$2.40b falling due within a year, and liabilities of US$1.34b due beyond that. Offsetting this, it had US$1.47b in cash and US$1.29b in receivables that were due within 12 months. So its liabilities total US$980.4m more than the combination of its cash and short-term receivables.

Since publicly traded Skechers U.S.A shares are worth a very impressive total of US$10.6b, 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. 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.

Also good is that Skechers U.S.A grew its EBIT at 17% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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. Skechers U.S.A may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Skechers U.S.A recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Skechers U.S.A's liabilities, but we can be reassured by the fact it has has net cash of US$839.0m. And we liked the look of last year's 17% year-on-year EBIT growth. So we don't have any problem with Skechers U.S.A's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Skechers U.S.A insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.