We Think Waberer's International Nyrt (BST:3WB) Is Taking Some Risk With Its Debt

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 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 Waberer's International Nyrt. (BST:3WB) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

Check out our latest analysis for Waberer's International Nyrt

How Much Debt Does Waberer's International Nyrt Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Waberer's International Nyrt had €49.8m of debt, an increase on €43.5m, over one year. But on the other hand it also has €66.4m in cash, leading to a €16.6m net cash position.

A Look At Waberer's International Nyrt's Liabilities

Zooming in on the latest balance sheet data, we can see that Waberer's International Nyrt had liabilities of €231.8m due within 12 months and liabilities of €213.7m due beyond that. Offsetting this, it had €66.4m in cash and €81.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €297.4m.

This deficit casts a shadow over the €127.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Waberer's International Nyrt would probably need a major re-capitalization if its creditors were to demand repayment. Waberer's International Nyrt boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Although Waberer's International Nyrt made a loss at the EBIT level, last year, it was also good to see that it generated €1.8m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Waberer's International Nyrt's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Waberer's International Nyrt 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. Happily for any shareholders, Waberer's International Nyrt actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Waberer's International Nyrt does have more liabilities than liquid assets, it also has net cash of €16.6m. And it impressed us with free cash flow of €74m, being 4,155% of its EBIT. So although we see some areas for improvement, we're not too worried about Waberer's International Nyrt's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Waberer's International Nyrt has 1 warning sign we think you should be aware of.

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. 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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