We Think Washington H. Soul Pattinson (ASX:SOL) Has A Fair Chunk Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Washington H. Soul Pattinson and Company Limited (ASX:SOL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Washington H. Soul Pattinson

How Much Debt Does Washington H. Soul Pattinson Carry?

As you can see below, at the end of July 2020, Washington H. Soul Pattinson had AU$834.4m of debt, up from AU$394.9m a year ago. Click the image for more detail. On the flip side, it has AU$549.0m in cash leading to net debt of about AU$285.5m.

How Healthy 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$484.5m due within 12 months and liabilities of AU$1.63b due beyond that. Offsetting these obligations, it had cash of AU$549.0m as well as receivables valued at AU$147.7m due within 12 months. So it has liabilities totalling AU$1.42b more than its cash and near-term receivables, combined.

Given Washington H. Soul Pattinson has a market capitalization of AU$7.29b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Washington H. Soul Pattinson's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Washington H. Soul Pattinson had a loss before interest and tax, and actually shrunk its revenue by 16%, to AU$1.4b. We would much prefer see growth.

Caveat Emptor

While Washington H. Soul Pattinson's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost AU$68m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of AU$210m and the profit of AU$953m. So one might argue that there's still a chance it can get things on the right track. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Washington H. Soul Pattinson (including 1 which is potentially serious) .

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.

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