Is Wiseway Group (ASX:WWG) A Risky Investment?

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 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 Wiseway Group Limited (ASX:WWG) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Wiseway Group

What Is Wiseway Group's Net Debt?

The image below, which you can click on for greater detail, shows that Wiseway Group had debt of AU$5.41m at the end of December 2020, a reduction from AU$5.69m over a year. However, it does have AU$12.4m in cash offsetting this, leading to net cash of AU$7.00m.

A Look At Wiseway Group's Liabilities

We can see from the most recent balance sheet that Wiseway Group had liabilities of AU$19.8m falling due within a year, and liabilities of AU$21.1m due beyond that. Offsetting these obligations, it had cash of AU$12.4m as well as receivables valued at AU$8.71m due within 12 months. So it has liabilities totalling AU$19.7m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Wiseway Group is worth AU$43.1m, 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. While it does have liabilities worth noting, Wiseway Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

We also note that Wiseway Group improved its EBIT from a last year's loss to a positive AU$6.3m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Wiseway Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Wiseway Group 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. Over the last year, Wiseway Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Wiseway Group does have more liabilities than liquid assets, it also has net cash of AU$7.00m. And it impressed us with free cash flow of AU$11m, being 169% of its EBIT. So we don't have any problem with Wiseway Group's use of debt. 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 example, we've discovered 3 warning signs for Wiseway Group that you should be aware of before investing here.

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. 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.
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