Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Skechers U.S.A Carry?
As you can see below, at the end of September 2024, Skechers U.S.A had US$628.9m of debt, up from US$351.5m a year ago. Click the image for more detail. But on the other hand it also has US$1.47b in cash, leading to a US$839.0m net cash position.
How Strong 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$2.40b falling due within a year, and liabilities of US$1.34b due beyond that. Offsetting these obligations, it had cash of US$1.47b as well as receivables valued at US$1.29b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$980.4m.
Given Skechers U.S.A has a market capitalization of US$9.31b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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!
And we also note warmly that Skechers U.S.A grew its EBIT by 17% last year, making its debt load easier to handle. 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're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Skechers U.S.A has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Skechers U.S.A's free cash flow amounted to 39% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
While Skechers U.S.A does have more liabilities than liquid assets, it also has net cash of US$839.0m. And it impressed us with its EBIT growth of 17% over the last year. So we are not troubled with Skechers U.S.A's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Skechers U.S.A insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
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.
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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.
