Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Skechers U.S.A., Inc. (NYSE:SKX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Skechers U.S.A Carry?
As you can see below, at the end of June 2020, Skechers U.S.A had US$763.3m of debt, up from US$114.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$1.46b in cash, so it actually has US$694.5m net cash.
How Strong Is Skechers U.S.A's Balance Sheet?
The latest balance sheet data shows that Skechers U.S.A had liabilities of US$1.08b due within a year, and liabilities of US$1.89b falling due after that. Offsetting these obligations, it had cash of US$1.46b as well as receivables valued at US$546.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$967.0m.
This deficit isn't so bad because Skechers U.S.A is worth US$4.75b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.
The modesty of its debt load may become crucial for Skechers U.S.A if management cannot prevent a repeat of the 53% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept 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. During the last three years, Skechers U.S.A produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Although Skechers U.S.A'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$694.5m. So we are not troubled with Skechers U.S.A's debt use. 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. For instance, we've identified 1 warning sign for Skechers U.S.A that 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.
This article by Simply Wall St is general in nature. 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.
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