Is Woodside Energy Group (ASX:WDS) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Woodside Energy Group Ltd (ASX:WDS) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Woodside Energy Group

How Much Debt Does Woodside Energy Group Carry?

The image below, which you can click on for greater detail, shows that Woodside Energy Group had debt of US$5.14b at the end of December 2022, a reduction from US$5.43b over a year. However, its balance sheet shows it holds US$6.88b in cash, so it actually has US$1.74b net cash.

How Healthy Is Woodside Energy Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Woodside Energy Group had liabilities of US$6.61b due within 12 months and liabilities of US$15.6b due beyond that. On the other hand, it had cash of US$6.88b and US$1.65b worth of receivables due within a year. So it has liabilities totalling US$13.7b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Woodside Energy Group is worth a massive US$41.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Woodside Energy Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Woodside Energy Group grew its EBIT by 151% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Woodside Energy Group 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Woodside Energy Group 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. During the last two years, Woodside Energy Group produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While Woodside Energy Group does have more liabilities than liquid assets, it also has net cash of US$1.74b. And it impressed us with its EBIT growth of 151% over the last year. So we don't think Woodside Energy Group's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Woodside Energy Group (2 don't sit too well with us!) that you should be aware of before investing here.

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.