The harsh reality for Wellard Limited (ASX:WLD) shareholders is that its auditors, PricewaterhouseCoopers LLP, expressed doubts about its ability to continue as a going concern, in its reported results to June 2020. This means that, based on the financial results to that date, the company arguably should raise capital, or otherwise strengthen the balance sheet, as soon as possible.
If the company does have to issue more shares, potential investors will be sure to consider how desperate it is for capital. So current risks on the balance sheet could have a big impact on how shareholders fare from here. The biggest concern we would have is the company's debt, since its lenders might force the company into administration if it cannot repay them.
What Is Wellard's Debt?
The image below, which you can click on for greater detail, shows that Wellard had debt of -AU$2.2m at the end of June 2020, a reduction from AU$110.1m over a year. However, its balance sheet shows it holds AU$16.8m in cash, so it actually has AU$19.0m net cash.
A Look At Wellard's Liabilities
Zooming in on the latest balance sheet data, we can see that Wellard had liabilities of AU$18.2m due within 12 months and liabilities of AU$13.8m due beyond that. Offsetting this, it had AU$16.8m in cash and AU$1.49m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$13.8m.
This deficit isn't so bad because Wellard is worth AU$35.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Wellard boasts net cash, so it's fair to say it does not have a heavy debt load!
We also note that Wellard improved its EBIT from a last year's loss to a positive AU$3.2m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Wellard will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Wellard has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Wellard actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
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 AU$19.0m. And it impressed us with free cash flow of AU$18m, being 543% 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. For instance, we've identified 3 warning signs for Wellard that you should be aware of.
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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