Does WEG (BVMF:WEGE3) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies WEG S.A. (BVMF:WEGE3) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for WEG

What Is WEG's Net Debt?

You can click the graphic below for the historical numbers, but it shows that WEG had R$1.50b of debt in June 2021, down from R$2.12b, one year before. However, its balance sheet shows it holds R$3.82b in cash, so it actually has R$2.32b net cash.

How Healthy Is WEG's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that WEG had liabilities of R$7.41b due within 12 months and liabilities of R$1.68b due beyond that. On the other hand, it had cash of R$3.82b and R$4.50b worth of receivables due within a year. So its liabilities total R$766.8m more than the combination of its cash and short-term receivables.

This state of affairs indicates that WEG's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the R$167.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, WEG boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that WEG has boosted its EBIT by 76%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if WEG 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While WEG 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 most recent three years, WEG recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that WEG has R$2.32b in net cash. And it impressed us with its EBIT growth of 76% over the last year. So is WEG's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in WEG, you may well want to click here to check an interactive graph of its earnings per share history.

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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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.
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