Does Wellard (ASX:WLD) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Wellard Limited (ASX:WLD) makes use of debt. But the more important question is: how much risk is that debt creating?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Wellard

What Is Wellard's Net Debt?

As you can see below, at the end of December 2020, Wellard had US$10.2m of debt, up from US$6.58m a year ago. Click the image for more detail. However, it also had US$5.06m in cash, and so its net debt is US$5.15m.

How Strong Is Wellard's Balance Sheet?

We can see from the most recent balance sheet that Wellard had liabilities of US$17.3m falling due within a year, and liabilities of US$673.0k due beyond that. Offsetting these obligations, it had cash of US$5.06m as well as receivables valued at US$1.26m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$11.6m.

This deficit isn't so bad because Wellard is worth US$24.4m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Wellard will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Wellard had a loss before interest and tax, and actually shrunk its revenue by 21%, to US$52m. To be frank that doesn't bode well.

Caveat Emptor

While Wellard's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$2.2m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$185 into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Wellard you should be aware of.

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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