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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that G-III Apparel Group, Ltd. (NASDAQ:GIII) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does G-III Apparel Group Carry?
As you can see below, G-III Apparel Group had US$414.0m of debt at July 2024, down from US$466.0m a year prior. But it also has US$414.8m in cash to offset that, meaning it has US$823.0k net cash.
How Healthy Is G-III Apparel Group's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that G-III Apparel Group had liabilities of US$546.4m due within 12 months and liabilities of US$637.2m due beyond that. On the other hand, it had cash of US$414.8m and US$477.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$291.4m.
While this might seem like a lot, it is not so bad since G-III Apparel Group has a market capitalization of US$1.41b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, G-III Apparel Group boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, G-III Apparel Group grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its 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 G-III Apparel Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. G-III Apparel Group 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. Over the most recent three years, G-III Apparel Group recorded free cash flow worth 58% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Summing Up
Although G-III Apparel Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$823.0k. And we liked the look of last year's 44% year-on-year EBIT growth. So we don't think G-III Apparel Group's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with G-III Apparel Group .
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.
