Would Washington H. Soul Pattinson (ASX:SOL) Be Better Off With Less Debt?

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 Washington H. Soul Pattinson and Company Limited (ASX:SOL) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Washington H. Soul Pattinson

How Much Debt Does Washington H. Soul Pattinson Carry?

The image below, which you can click on for greater detail, shows that at January 2021 Washington H. Soul Pattinson had debt of AU$864.3m, up from AU$589.4m in one year. However, because it has a cash reserve of AU$727.1m, its net debt is less, at about AU$137.1m.

A Look At Washington H. Soul Pattinson's Liabilities

Zooming in on the latest balance sheet data, we can see that Washington H. Soul Pattinson had liabilities of AU$478.3m due within 12 months and liabilities of AU$1.72b due beyond that. Offsetting this, it had AU$727.1m in cash and AU$173.8m in receivables that were due within 12 months. So it has liabilities totalling AU$1.30b more than its cash and near-term receivables, combined.

Given Washington H. Soul Pattinson has a market capitalization of AU$7.92b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Washington H. Soul Pattinson 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.

In the last year Washington H. Soul Pattinson had a loss before interest and tax, and actually shrunk its revenue by 24%, to AU$1.3b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Washington H. Soul Pattinson's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at AU$92m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of AU$226m and the profit of AU$971m. 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. We've identified 1 warning sign with Washington H. Soul Pattinson , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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