Is Washington H. Soul Pattinson (ASX:SOL) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Washington H. Soul Pattinson and Company Limited (ASX:SOL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Washington H. Soul Pattinson

What Is Washington H. Soul Pattinson's Debt?

The image below, which you can click on for greater detail, shows that Washington H. Soul Pattinson had debt of AU$319.3m at the end of January 2023, a reduction from AU$669.9m over a year. However, its balance sheet shows it holds AU$1.10b in cash, so it actually has AU$784.0m net cash.

How Strong Is Washington H. Soul Pattinson's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Washington H. Soul Pattinson had liabilities of AU$145.9m due within 12 months and liabilities of AU$833.1m due beyond that. On the other hand, it had cash of AU$1.10b and AU$223.2m worth of receivables due within a year. So it actually has AU$347.7m more liquid assets than total liabilities.

This surplus suggests that Washington H. Soul Pattinson has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Washington H. Soul Pattinson boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Washington H. Soul Pattinson has boosted its EBIT by 35%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Washington H. Soul Pattinson can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Washington H. Soul Pattinson 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 two years, Washington H. Soul Pattinson recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Washington H. Soul Pattinson has net cash of AU$784.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in AU$923m. So is Washington H. Soul Pattinson's debt a risk? It doesn't seem so to us. 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 2 warning signs for Washington H. Soul Pattinson (of which 1 can't be ignored!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.