Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Skechers U.S.A., Inc. (NYSE:SKX) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Skechers U.S.A
How Much Debt Does Skechers U.S.A Carry?
As you can see below, Skechers U.S.A had US$312.0m of debt at June 2021, down from US$763.3m a year prior. But it also has US$1.20b in cash to offset that, meaning it has US$886.9m net cash.
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$1.34b due within 12 months and liabilities of US$1.41b due beyond that. On the other hand, it had cash of US$1.20b and US$844.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$707.1m.
Given Skechers U.S.A has a market capitalization of US$7.05b, it's hard to believe these liabilities pose much 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!
Better yet, Skechers U.S.A grew its EBIT by 134% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 50% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing up
While Skechers U.S.A does have more liabilities than liquid assets, it also has net cash of US$886.9m. And it impressed us with its EBIT growth of 134% over the last year. So is Skechers U.S.A's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Skechers U.S.A you should know about.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
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About NYSE:SKX
Skechers U.S.A
Designs, develops, markets, and distributes footwear for men, women, and children worldwide.
Good value with adequate balance sheet.
