We Think West African Resources (ASX:WAF) Can Stay On Top Of Its Debt

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.' 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. As with many other companies West African Resources Limited (ASX:WAF) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for West African Resources

What Is West African Resources's Debt?

You can click the graphic below for the historical numbers, but it shows that West African Resources had AU$79.3m of debt in June 2022, down from AU$148.7m, one year before. However, it does have AU$221.8m in cash offsetting this, leading to net cash of AU$142.5m.

How Strong Is West African Resources' Balance Sheet?

The latest balance sheet data shows that West African Resources had liabilities of AU$153.6m due within a year, and liabilities of AU$56.7m falling due after that. Offsetting this, it had AU$221.8m in cash and AU$31.9m in receivables that were due within 12 months. So it can boast AU$43.4m more liquid assets than total liabilities.

This short term liquidity is a sign that West African Resources could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, West African Resources boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, West African Resources grew its EBIT by 57% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine West African Resources's ability to maintain a healthy balance sheet going forward. 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. While West African Resources 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. In the last three years, West African Resources's free cash flow amounted to 28% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case West African Resources has AU$142.5m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 57% over the last year. So is West African Resources's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for West African Resources that you should be aware of.

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.