Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Skechers USA, Inc. (NYSE: SKX) uses debt. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest review for Skechers USA
How much debt is Skechers USA?
You can click on the graph below for the historical figures, but it shows that Skechers USA was in debt of $ 326.8 million in September 2021, up from $ 812.0 million a year earlier. However, it has US $ 1.04 billion in cash offsetting this, which leads to a net cash position of US $ 715.8 million.
How strong is Skechers USA’s balance sheet?
We can see from the most recent balance sheet that Skechers USA had liabilities of US $ 1.34 billion maturing within one year and liabilities of US $ 1.43 billion maturing beyond that. . In compensation for these obligations, it had cash of US $ 1.04 billion as well as receivables valued at US $ 840.1 million maturing within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 886.9 million.
Of course, Skechers USA has a market cap of US $ 6.50 billion, so this liability is likely manageable. Having said that, it is clear that we must continue to monitor his record lest it get worse. While it has some liabilities to note, Skechers USA also has more cash than debt, so we’re pretty confident it can handle its debt safely.
Even more impressive was the fact that Skechers USA increased its EBIT by 242% year over year. If sustained, this growth will make debt even more manageable in the years to come. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine Skechers USA’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 Analyst Profit Forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Although Skechers USA has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building ( or erodes) this cash balance. Over the past three years, Skechers USA’s free cash flow has been 27% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.
Although Skechers USA has more liabilities than liquid assets, it also has net cash of US $ 715.8 million. And we liked the appearance of the 242% year-over-year growth in EBIT from last year. So is Skechers USA’s debt a risk? It does not seem to us. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example – Skechers USA has 1 warning sign we think you should be aware.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.