RATIO ANALYSIS OF SKETCHERS

a) Introduction
Skechers USA, Inc. is a lifestyle and performance footwear company based in California, USA. The company
sells footwear under two categories. Their lifestyle division includes such products as Skechers Memory Foam.
Their performance division includes the Skechers GOrun.

Skechers was founded in 1983 by Robert Greenberg after he was forced out of L.A. Gear. L.A. Gear, which was
also founded by Greenberg, was the most popular shoe brand among American women at the time. By 1990,
L.A. Gear was grossing more than $900 million in sales. With the aid of its neon tennis shoes, the company
occupied a unique niche in the marketplace. By 1992 however, after a series of missteps caused the company to
take an unexpected turn for the worse, its founder was forced to leave the company.
Immediately after his departure from L.A. Gear, Greenberg wasted no time in founding Skechers. Greenberg
discovered an unoccupied niche in the market for street shoes for the young hip consumer. So learning from his
mistakes at L.A. Gear, Greenberg began marketing fashionable street shoes for the stylish consumer. Skechers
garnered its first nationwide success in 1993 with the introduction of a design known as the ‘Chrome Dome’.

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 b)
i. Liquidity Ratios

Ratios 2016 2017 2018 2019

(in thousands) (in thousands) (in thousands) (in thousands)
Current ratio: 1,827,766 / 2,105,024 / 2,472,140 / 2,819,591 /
621,730 597,348 850,222 1,238,231
Current assets / = = = =
Current Liabilities 2.940 3.524 2.908 2.277
Times Times Times Times

Quick ratio: (1,827,766 – (2,105,024 – (2,472,140 – (2,819,591 –

700,515) / 873,016) / 863,260) / 1,069,863) /
(Current assets – 621,730 597,348 850,222 1,238,231
Inventory) / = = = =
Current liabilities 1.813 2.0624 1.892 1.413
Times Times Times Times
Cash ratio: 718,536 / 736,431 / 872,237 / 824,876 /
621,730 597,348 850,222 1,238,231
Cash equivalents / = = = =
Current liabilities 1.156 1.233 1.0259 0.666
Times Times Times Times

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3.52
3.5
2.94 2.91
3
2.28
2.5 2.06
1.81 1.89
2
1.41
1.5 1.16 1.23
1.03
1 0.67

0.5

0
2016 2017 2018 2019

Current Ratio Quick Ratio Cash Ratio

Liquidity ratios show a company’s ability to meet its short-term goals. If liquidity of a firm is inadequate, firms
would not be able to pay their creditors within the agreed upon time. Conversely an excess of liquidity can
indicate that a company is being too risk-averse.

Current ratio shows the company’s ability to pay its short-term debts using its liquid assets. It is generally
accepted that a healthy company will have a current ratio that falls between 1.5 and 3. The ratio being close to 3
in the first three years proves a significant number of liquid assets that are lying idle. The much healthier ratio in
2019 can be attributed to the additional payments for long-term borrowings. Skechers quick ratio displayed a
similar trend. Quick ratio shows the relationship between a company’s current liabilities and its liquid assets.
Inventories are the least liquid of the current assets, and therefore excluded from the calculation. Inventories are
considered less liquid as it takes much longer for them to be converted into cash. Companies are considered
liquid if their quick ratio is above 1:1. Cash ratio shows a company’s ability to pay off its short-term debts with
only its cash. Generally, a ratio between 0.5 and 1 is preferred. Although Skechers saw a minor dip in 2019, the
company has still remained within the scope of a healthy liquidity. This drop was not due to a decrease in cash

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but an increase in current liabilities. In 2019, Skechers acquired lease assets, and with it, Operating lease
liabilities. This can account for the increase in current liabilities.

ii. Asset management ratios

Ratios 2016 2017 2018 2019

(in thousands) (in thousands) (in thousands) (in thousands)
Payables turnover: 1,928,715 / 2,225,271 / 2,418,463 / 2,728,894 /
Cost of sales / 520,437 505,334 679,553 764,844
Accounts payable = = = =
3.706 4.404 3.559 3.568
Times Times Times Times
Days costs in 365 / 365 / 365 / 365 /
payables: 3.706 4.404 3.559 3.568
365 / = = = =
Payable turnover 98 days 83 days 103 days 102 days

Fixed asset 3,563,311 / 4,164,160 / 4,642,068 / 5,220,051 /

turnover: 565,904 630,058 756,115 2,073,352
Sales / = = = =
Fixed assets 6.297 6.609 6.139 2.518
Times Times Times Times

6.61
7 6.3 6.14

5 4.4

3.71 3.56 3.57

4

3 2.52

0
2016 2017 2018 2019

Payables Turnover Fixed Asset Turnover

Asset management ratios shows how efficiently a company is able to utilize its assets to generate revenue by
comparing its assets to its sales revenue. High asset turnover ratios indicate proficient use of assets and tell
creditors that a company is operating under full capacity.

Payable turnover ratio measures how many times in a given period a company is able to pay off its suppliers. A
high payable turnover ratio is not always a good thing, many companies tend to extend their credit turnover
period to improve their liquidity. The days costs in payable indicates how many days specifically it takes for the
suppliers to be paid. Skechers payable turnover has stayed steady throughout the four years, with them being
able to pay more frequently in 2017. This would be the result of their liquidity increasing in 2017, which means
they would have had more liquid assets leftover to pay off suppliers. The fixed asset turnover ratio deciphers
how efficiently fixed assets like plant and machinery are being used to generate sales. The higher this ratio the
better, as fixed assets are expensive to acquire and maintain, companies have to ensure they are getting their
money’s worth. The sudden plummet of this ratio in 2019 from a very steady trend was due to the attainment of

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$ 1,073,660 worth of fixed assets during the year. Skechers may not have had enough time to make use of this
new asset.

iii. Financial leverage ratios

Ratios 2016 2017 2018 2019

(in thousands) (in thousands) (in thousands) (in thousands)
Total debt ratio: (2,393,670 – (2,735,082 – (3,228,255 – (4,892,943 –
(Total assets – 1,685,514) / 1,948,211) / 2,189,275) / 2,536,107) /
Total equity) / 2,393,670 2,735,082 3,228,255 4,892,943
Total assets = = = =
0.296 times 0.288 times 0.322 times 0.482 times
Equity multiplier: 2,393,670 / 2,735,082 / 3,228,255 / 4,892,943 /
Total assets / 1,685,514 1,948,211 2,189,275 2,536,107
Total equity = = = =
1.420 times 1.404 times 1.475 times 1.929 times
Times interest 370,518 / 382,880 / 437,765 / 518,443 /
earned: 6,270 6,677 5,847 7,509
Earnings before = = = =
interest and taxes / 59.0938 times 57.343 times 74.870 times 69.0429 times
Interest paid
1.93
2

1.8

1.6 1.48
1.42 1.4
1.4

1.2

0.8
0.48
0.6
0.3 0.29 0.32
0.4

0.2

0
2016 2017 2018 2019

Total Debt Ratio Equity Multiplier

Unlike liquidity ratios, financial leverage ratios show a company’s long-term creditworthiness. These are the
ratios that show long term-creditors like debenture holders the magnitude of a company’s debt financing.

Total debt ratio illustrates the proportion of assets that are financed by liabilities. Skechers annual report shows
an increase in its accounts payable and accrued expenses that caused its total liabilities to rise by $252,102 in
2018. 2019 ended with Skechers total liabilities more than doubling due to the addition of operating lease
liabilities, causing rise in debt ratio. Despite the high leverage, Skechers still has twice as many assets as it has
liabilities, and is therefore in a reasonably safe position. Equity multiplier demonstrates how much of a firm’s
assets are being financed by equity, and consequently how much is financed by debt. Shareholders benefit from
leverage being a little high as it ensures a high ROE. By the end of 2019, 51.83% of Skechers assets were
financed by equity and 48.17% was financed by debt. Borrowing large amounts is not necessarily a bad thing, if
the company is using its assets effectively and is making enough profit to cover the debt. Times interest earned
ratio is an indicator of how much of a company’s pre-tax income can be used to cover interest expenses. In 2019
Skechers made enough income to pay interest 69 times over. This however is not always an indicator of

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efficiency, Skechers average TIER of 48.4 is phenomenally higher than its competitors, with only Ralph Lauren
Corporation coming even close. This is an indicator of misappropriation of earnings.

iv. Profitability

Ratios 2016 2017 2018 2019

(in thousands) (in thousands) (in thousands) (in thousands)
Net profit margin: 285,359 / 235,104 / 371,273 / 427,252 /
Net income / 3,563,311 4,164,160 4,642,068 5,220,051
Sales × 100 × 100 × 100 × 100 × 100
= 8.00% = 5.65% = 7.998% = 8.18%
Return on assets: 285,359 / 235,104 / 371,273 / 427,252 /
Net income / 2,393,670 2,735,082 3,228,255 4,892,943
Total assets × 100 × 100 × 100 × 100
× 100 = 11.92% = 8.60% = 11.50% = 8.73%
Return on equity: 285,359 / 235,104 / 371,273 / 427,252 /
Net income / 1,685,514 1,948,211 2,189,275 2,536,107
Total equity × 100 × 100 × 100 × 100
× 100 = 16.93% = 12.068% = 16.96% = 16.85%

18.00% 16.93% 16.96% 16.86%

16.00%

14.00%
11.92% 12.07%
11.50%
12.00%

10.00% 8.60% 8.73%

8.00% 7.99% 8.18%
8.00%
5.65%
6.00%

4.00%

2.00%

0.00%
2016 2017 2018 2019

Net Profit Margin Return on Assets Return on Equity

Profitability ratios are the most commonly used barometer for financial analysis, they measure a company’s
ability to earn a profit relative to its assets, equity, sales, etc... The higher profitability ratios are the better,
especially compared to the profitability ratios of competitors.

Net profit margin demonstrations how much of each dollar earned from revenue converts into profit. By
observing the fluctuations in the margin, companies will be able to tell if current business practices need
improvement. Skechers net profit margin has stayed relatively stable throughout the four years, except for the
dip in 2017. This was due to the combination of sales increasing from 2016 to 2017 and net earnings decreasing.
This proves that despite an improvement in revenue, if a company isn’t able to manage its expenses efficiently
enough to make a profit, its overall profitability will suffer. ROA is an indicator of how profitable a company is
parallel to its total assets. ROA shows to investors how effective a company is in converting their investment
into net profit. Although its total assets continuously rose from 2016 to 2017, Skechers ROA fluctuated. The
drop in 2017 can be explained by the decrease in net income, whereas the increase in income in 2019 was not

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enough to compensate for the increase in total assets. While ROA accounts for both a company’s equities and
liabilities, ROE only accounts for the equity. Skechers stream of steadiness was interrupted by the drop in 2017,
the result of decrease in profits not being able to compensate for the increase in equity.

c) Problems and Solutions

Compared to its selected competitors, which were chosen because they operate in a related industry or sector,
keeping in mind size, growth, and various financial metrics, Skechers performance overall has improved and
remained healthy, never falling below the 60th percentile in any of the ratios that were analysed. This of course
does not mean that there isn’t room for improvement. (The Complete Toolbox for Investors | finbox.com, n.d.)

2017 showed a drop in all profitability ratios, despite the monumental growth in sales to $4 billion for the first
time in their 25-year history. The reason for the sales growth can also explain the lesser profitability. Skechers
international growth due to its concept stores and the new focus on e-commerce while increasing sales would
also increase expenses, especially in the beginning stages. These risky efforts proved to be fruitful in the future
as illustrated by the improved profitability in consecutive years.

A trend that was prevalent during the first three years was Skechers extremely high liquidity. By the end of the
last quarter, Skechers average current ratio was higher than 93.7% of its competitors. While high liquidity
means Skechers would not have to worry about its short term debts, it also could indicate to investors that the
company is not investing effectively. Since liquid assets don’t yield any return and don’t earn much interest, this
means Skechers had a number of liquid assets lying idle that could otherwise have earned revenue if they had
been invested in new ventures. There are a number of things a company like Skechers could do to make more
efficient use of its liquid assets and therefore producing a more attractive current ratio. They could increase their
short-term loans, this would result in increased current liabilities. Another way to increase current liabilities
would be to shorten the span of long-term loans, this way more of the loan payment would be due within the
annual year. Skechers seems to have done exactly this in 2019, their current instalment of long-term borrowings
increased by $64,568. Another direction Skechers can go is reducing current assets by spending more of their
excess cash by acquiring more fixed assets. While Skechers did acquire fixed assets in the last year, the main
difference this acquisition made was not in the current assets but in current liabilities in the form of operating
lease liabilities.

An area where Skechers seems to have faltered a bit in 2019 was with fixed asset turnover, this was mainly due
to newly acquired properties, plants, equipment and leased assets, the latter of which cost $1,073,660. Skechers
did not seem to have made proper use of these assets yet to profit from them and the revenue for the year could
not cover them. Skechers should endeavour to use these assets efficiently enough that they don’t become a
hindrance. They could measure a machines output and make sure its operating at its full potential while keeping
labour costs low. Properly utilized fixed assets operating at full capacity will aid in increasing sales and
maximizing overall profitability. Skechers could also sell off fixed assets that aren’t used often enough to justify
the cost of their upkeep. Regular purging of wasteful fixed assets will help improve a company’s bottom line,
money from these sales can be used to lease equipment instead of buying them, since leased equipment do not
count as fixed assets asset turnover will not be negatively affected. The simplest way to improve asset turnover
is to increase revenue, Skechers could examine their operation to determine whether they’re leaving products in
their warehouse for too long, and if they do, find ways to move them quicker, by using marketing tactics like
discounts, and bulk buying. Employing these tactics will also help build brand loyalty, and repeat customers
mean more revenue.

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 d) Self-reflection
I have been familiar with ratio calculations and analysis since high school, but this familiarity was a superficial
one at best. In the process of completing this assignment I have gained a deeper understanding of ratios and how
they illustrate the fluctuations in a company’s performance and how stakeholders use this information to make
financial decisions.

The first thing I did was assess the tasks I needed to do and categorize them by easiest to accomplish to hardest.
I decided to start from the easiest task and as I learned more about ratio analysis and my confidence grew move
on to more difficult tasks. Since the calculation of the ratios themselves were the simplest task, I did them first.
Then I set a timeline for myself where I would write the analysis for one category of ratios a day. Then I would
have plenty of time to write up problems and solutions. This allowed me to compartmentalize the learning
process. I was able to focus my attention on one task without having to worry about the others. This also
allowed me to acquire more extensive knowledge on specific aspects of ratio analysis. For example when
analyzing liquidity ratios, I had enough time to examine the financial statements of Skechers, read newspaper
articles and financial reports to figure out why its liquidity was so high, this information provided me with the
knowledge to offer solutions to this problem. My desire to understand the reasons behind fluctuations in ratios
lead me to discover helpful websites like finbox.com which provided useful figures and comparisons to
Skechers industry and competitors.

Overall this assignment has taught me things I never knew before about ratios analysis and the apparel industry.

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References

1. Finbox.com. n.d. The Complete Toolbox For Investors | Finbox.Com. [online] Available at:
<https://finbox.com/NYSE:SKX/explorer/interest_coverage> [Accessed 19 May 2020].

2. Green, T., 2017. It's Time For Skechers USA Inc To Do Something With Its Cash | The Motley Fool.
[online] The Motley Fool. Available at: <https://www.fool.com/investing/2017/02/12/its-time-for-
skechers-usa-inc-to-do-something-with.aspx> [Accessed 21 May 2020].

3. Referenceforbusiness.com. n.d. Skechers U.S.A. Inc. - Company Profile, Information, Business

Description, History, Background Information On Skechers U.S.A. Inc.. [online] Available at:
<https://www.referenceforbusiness.com/history2/87/Skechers-U-S-A-Inc.html> [Accessed 8 May
2020].

4. Skechers U.S.A., Inc. n.d. Annual Reports. [online] Available at:

<https://investors.skechers.com/financial-data/annual-reports> [Accessed 8 May 2020].

5. SRI Shoe Warehouse. 2016. A Brief History Of Skechers Shoes. [online] Available at:
<https://www.srishoes.com/blogs/news/brief-history-skechers-shoes> [Accessed 8 May 2020].

6. Withers, B., 2018. Up 54% In 2017, Skechers Stomps Out A Solid Year | The Motley Fool. [online] The
Motley Fool. Available at: <https://www.fool.com/investing/2018/01/08/up-54-in-2017-skechers-
stomps-out-a-solid-year.aspx> [Accessed 21 May 2020].