Yahoo Finance Wellard (ASX:WLD) Has A Pretty Healthy Balance Sheet
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Wellard Limited (ASX:WLD) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Wellard
What Is Wellard's Net Debt?
As you can see below, Wellard had US$1.65m of debt at December 2021, down from US$10.2m a year prior. However, its balance sheet shows it holds US$4.45m in cash, so it actually has US$2.80m net cash.
How Healthy Is Wellard's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Wellard had liabilities of US$12.1m due within 12 months and liabilities of US$1.55m due beyond that. Offsetting these obligations, it had cash of US$4.45m as well as receivables valued at US$3.05m due within 12 months. So it has liabilities totalling US$6.20m more than its cash and near-term receivables, combined.
Since publicly traded Wellard shares are worth a total of US$38.5m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Wellard also has more cash than debt, so we're pretty confident it can manage its debt safely.
It was also good to see that despite losing money on the EBIT line last year, Wellard turned things around in the last 12 months, delivering and EBIT of US$5.2m. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Wellard will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Wellard 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. Happily for any shareholders, Wellard actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
Although Wellard'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$2.80m. And it impressed us with free cash flow of US$6.6m, being 128% of its EBIT. So we are not troubled with Wellard's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Wellard you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
