Wellard (ASX:WLD) Has Debt But No Earnings; Should You Worry?

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 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 can see that Wellard Limited (ASX:WLD) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Wellard

How Much Debt Does Wellard Carry?

As you can see below, at the end of June 2023, Wellard had US$2.44m of debt, up from US$1.96m a year ago. Click the image for more detail. But it also has US$7.42m in cash to offset that, meaning it has US$4.98m net cash.

How Strong Is Wellard's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wellard had liabilities of US$7.75m due within 12 months and liabilities of US$72.0k due beyond that. Offsetting this, it had US$7.42m in cash and US$1.61m in receivables that were due within 12 months. So it can boast US$1.21m more liquid assets than total liabilities.

This short term liquidity is a sign that Wellard could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Wellard boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 14%, to US$39m. We would much prefer see growth.

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. And over the same period it saw negative free cash outflow of US$2.2m and booked a US$15m accounting loss. But at least it has US$4.98m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. To that end, you should be aware of the 1 warning sign we've spotted with Wellard .

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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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.