We Think Western Investment Company of Canada (CVE:WI) Has A Fair Chunk Of Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, The Western Investment Company of Canada Limited (CVE:WI) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Western Investment Company of Canada

How Much Debt Does Western Investment Company of Canada Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Western Investment Company of Canada had CA$4.89m of debt, an increase on CA$2.88m, over one year. And it doesn't have much cash, so its net debt is about the same.

A Look At Western Investment Company of Canada's Liabilities

We can see from the most recent balance sheet that Western Investment Company of Canada had liabilities of CA$769.9k falling due within a year, and liabilities of CA$4.27m due beyond that. Offsetting these obligations, it had cash of CA$5.3k as well as receivables valued at CA$48.1k due within 12 months. So it has liabilities totalling CA$4.99m more than its cash and near-term receivables, combined.

Western Investment Company of Canada has a market capitalization of CA$8.49m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Western Investment Company of Canada will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Given it has no significant operating revenue at the moment, shareholders will be hoping Western Investment Company of Canada can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

Over the last twelve months Western Investment Company of Canada produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$190k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$110k in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Western Investment Company of Canada 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. 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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