Skechers USA (NYSE: SKX) could easily take on more debt
Some say volatility, rather than debt, is the best way to view risk as an investor, but Warren Buffett said “volatility is far from risk.” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We note that Skechers USA, Inc. (NYSE: SKX) has debt on its balance sheet. But does this debt worry shareholders?
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest review for Skechers USA
How much debt does Skechers USA have?
As you can see below, Skechers USA had a debt of US $ 312.0 million in June 2021, up from US $ 763.3 million the year before. But it also has $ 1.20 billion in cash to make up for that, which means it has $ 886.9 million in net cash.
How healthy is Skechers USA’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Skechers USA had a liability of US $ 1.34 billion due within 12 months and a liability of US $ 1.41 billion beyond. On the other hand, he had $ 1.20 billion in cash and $ 844.5 million in receivables due within a year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 707.1 million.
Considering that Skechers USA has a market capitalization of US $ 7.05 billion, it is hard to believe that these liabilities pose a significant threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. Despite its notable liabilities, Skechers USA has a net cash flow, so it is fair to say that it does not have a heavy debt load!
Best of all, Skechers USA increased its EBIT by 134% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in the years to come. There is no doubt that we learn the most about debt from the balance sheet. 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 earnings forecast report interesting.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. Skechers USA may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and capacity. to manage debt. Over the past three years, Skechers USA has recorded free cash flow of 50% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.
Although Skechers USA has more liabilities than liquid assets, it also has net cash of US $ 886.9 million. And it impressed us with its EBIT growth of 134% over last year. So is Skechers USA’s debt a risk? It does not seem to us. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Skechers USA you should know.
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.
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