Health Check: How Prudently Does Skillz (NYSE:SKLZ) Use Debt?

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.' 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. As with many other companies Skillz Inc. (NYSE:SKLZ) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for Skillz

What Is Skillz's Net Debt?

The chart below, which you can click on for greater detail, shows that Skillz had US$125.2m in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds US$301.4m in cash, so it actually has US$176.2m net cash.

How Healthy Is Skillz's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Skillz had liabilities of US$55.5m due within 12 months and liabilities of US$135.2m due beyond that. Offsetting this, it had US$301.4m in cash and US$5.27m in receivables that were due within 12 months. So it can boast US$116.0m more liquid assets than total liabilities.

This surplus strongly suggests that Skillz has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Skillz boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Skillz 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.

Over 12 months, Skillz made a loss at the EBIT level, and saw its revenue drop to US$106m, which is a fall of 37%. That makes us nervous, to say the least.

So How Risky Is Skillz?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Skillz had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$2.3m of cash and made a loss of US$37m. While this does make the company a bit risky, it's important to remember it has net cash of US$176.2m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should learn about the 2 warning signs we've spotted with Skillz (including 1 which can't be ignored) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.