Is WISeKey International Holding (VTX:WIHN) Using Debt In A Risky Way?

Warren Buffett famously said, '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 WISeKey International Holding AG (VTX:WIHN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for WISeKey International Holding

How Much Debt Does WISeKey International Holding Carry?

The image below, which you can click on for greater detail, shows that at December 2020 WISeKey International Holding had debt of US$14.3m, up from US$8.22m in one year. But it also has US$28.8m in cash to offset that, meaning it has US$14.6m net cash.

A Look At WISeKey International Holding's Liabilities

We can see from the most recent balance sheet that WISeKey International Holding had liabilities of US$25.0m falling due within a year, and liabilities of US$13.5m due beyond that. Offsetting this, it had US$28.8m in cash and US$3.70m in receivables that were due within 12 months. So its liabilities total US$5.91m more than the combination of its cash and short-term receivables.

Since publicly traded WISeKey International Holding shares are worth a total of US$124.4m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, WISeKey International Holding boasts net cash, so it's fair to say it does not have a heavy debt load! 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 WISeKey International Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year WISeKey International Holding had a loss before interest and tax, and actually shrunk its revenue by 35%, to US$15m. To be frank that doesn't bode well.

So How Risky Is WISeKey International Holding?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year WISeKey International Holding had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$13m and booked a US$29m accounting loss. Given it only has net cash of US$14.6m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for WISeKey International Holding (1 can't be ignored) you should be aware of.

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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