Here’s why Skechers USA (NYSE:SKX) can manage its debt responsibly

Howard Marks said 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 that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Mostly, Skechers USA, Inc. (NYSE:SKX) is in debt. But should shareholders worry about its use of debt?

Why is debt risky?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.

See our latest analysis for Skechers USA

What is Skechers USA’s net debt?

You can click on the chart below for historical numbers, but it shows Skechers USA had $341.6 million in debt in December 2021, up from $735.0 million a year prior. However, he has $894.9 million in cash to offset that, which translates to net cash of $553.3 million.

NYSE: SKX Debt to Equity April 6, 2022

How healthy is Skechers USA’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Skechers USA had liabilities of US$1.45 billion due within 12 months and liabilities of US$1.50 billion due beyond. In return, it had $894.9 million in cash and $812.8 million in receivables due within 12 months. It therefore has liabilities totaling $1.24 billion more than its cash and short-term receivables, combined.

Of course, Skechers USA has a market capitalization of US$6.25 billion, so those liabilities are probably manageable. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future. While it has liabilities to note, Skechers USA also has more cash than debt, so we’re pretty confident it can manage its debt safely.

Even more impressive is the fact that Skechers USA increased its EBIT by 347% year-over-year. If sustained, this growth will make debt even more manageable in years to come. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Skechers USA’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. 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) to free cash flow, to help us understand how quickly it’s building ( or erodes) this treasury. balance. Over the past three years, Skechers USA has created free cash flow of 9.1% of its EBIT, an uninspiring performance. For us, such a low cash conversion creates a bit of paranoia about the ability to extinguish the debt.

Abstract

Although Skechers USA has more liabilities than liquid assets, it also has a net cash position of US$553.3 million. And it has impressed us with its EBIT growth of 347% over the past year. We are therefore not concerned about Skechers USA’s use of debt. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we have identified 3 warning signs for Skechers USA (2 should not be ignored) which you should be aware of.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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