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We Think Deckers Outdoor (NYSE:DECK) Can Manage Its Debt With Ease

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Simply Wall St
·4 min read
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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Deckers Outdoor Corporation (NYSE:DECK) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Deckers Outdoor

How Much Debt Does Deckers Outdoor Carry?

The image below, which you can click on for greater detail, shows that Deckers Outdoor had debt of US$39.9m at the end of September 2020, a reduction from US$44.2m over a year. But on the other hand it also has US$626.4m in cash, leading to a US$586.5m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Deckers Outdoor's Liabilities

According to the last reported balance sheet, Deckers Outdoor had liabilities of US$503.8m due within 12 months, and liabilities of US$303.5m due beyond 12 months. Offsetting this, it had US$626.4m in cash and US$348.9m in receivables that were due within 12 months. So it can boast US$167.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Deckers Outdoor could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Deckers Outdoor has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Deckers Outdoor grew its EBIT at 15% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Deckers Outdoor can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Deckers Outdoor 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 last three years, Deckers Outdoor actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Deckers Outdoor has net cash of US$586.5m, as well as more liquid assets than liabilities. The cherry on top was that in converted 104% of that EBIT to free cash flow, bringing in US$456m. So is Deckers Outdoor's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Deckers Outdoor you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.