Western Resources (TSE:WRX) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Western Resources Corp. (TSE:WRX) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Western Resources

What Is Western Resources's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Western Resources had CA$91.2m of debt, an increase on CA$61.2m, over one year. On the flip side, it has CA$19.9m in cash leading to net debt of about CA$71.3m.

How Strong Is Western Resources' Balance Sheet?

We can see from the most recent balance sheet that Western Resources had liabilities of CA$11.9m falling due within a year, and liabilities of CA$100.5m due beyond that. Offsetting this, it had CA$19.9m in cash and CA$652.7k in receivables that were due within 12 months. So it has liabilities totalling CA$91.9m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CA$112.2m, so it does suggest shareholders should keep an eye on Western Resources' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Western Resources's earnings that will influence how the balance sheet holds up in the future. 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 Resources can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

Importantly, Western Resources had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CA$1.8m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$41m of cash over the last year. So in short it's a really risky stock. 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. Be aware that Western Resources is showing 5 warning signs in our investment analysis , and 4 of those are significant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.