Is Wellard (ASX:WLD) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Wellard Limited (ASX:WLD) 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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Wellard

What Is Wellard's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Wellard had US$2.12m of debt, an increase on US$1.33m, over one year. But on the other hand it also has US$6.48m in cash, leading to a US$4.36m net cash position.

A Look At Wellard's Liabilities

The latest balance sheet data shows that Wellard had liabilities of US$5.36m due within a year, and liabilities of US$33.0k falling due after that. On the other hand, it had cash of US$6.48m and US$904.0k worth of receivables due within a year. So it actually has US$1.99m more liquid assets than total liabilities.

It's good to see that Wellard has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Wellard boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Wellard's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Wellard had a loss before interest and tax, and actually shrunk its revenue by 24%, to US$34m. That makes us nervous, to say the least.

So How Risky Is Wellard?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Wellard lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$1.7m of cash and made a loss of US$9.9m. With only US$4.36m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Wellard you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.