Skechers U.S.A (NYSE:SKX) Has A Somewhat Strained Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. 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?

The chart below, which you can click on for greater detail, shows that Skechers U.S.A had US$339.3m in debt in December 2022; about the same as the year before. However, it does have US$717.9m in cash offsetting this, leading to net cash of US$378.6m.

How Healthy 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$1.61b falling due within a year, and liabilities of US$1.41b due beyond that. Offsetting this, it had US$717.9m in cash and US$934.3m in receivables that were due within 12 months. So it has liabilities totalling US$1.37b more than its cash and near-term receivables, combined.

Since publicly traded Skechers U.S.A shares are worth a total of US$7.98b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

But the other side of the story is that Skechers U.S.A saw its EBIT decline by 8.6% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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. 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. Considering the last three years, Skechers U.S.A actually recorded a cash outflow, overall. 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$378.6m. So although we see some areas for improvement, we're not too worried about Skechers U.S.A's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Skechers U.S.A you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.