Is Wedia (EPA:ALWED) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Wedia SA (EPA:ALWED) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Wedia

How Much Debt Does Wedia Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Wedia had debt of €3.04m, up from €2.66m in one year. However, it does have €5.77m in cash offsetting this, leading to net cash of €2.73m.

How Healthy Is Wedia's Balance Sheet?

The latest balance sheet data shows that Wedia had liabilities of €6.50m due within a year, and liabilities of €2.62m falling due after that. Offsetting these obligations, it had cash of €5.77m as well as receivables valued at €5.02m due within 12 months. So it can boast €1.67m more liquid assets than total liabilities.

This short term liquidity is a sign that Wedia could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Wedia boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Wedia grew its EBIT by 150% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Wedia's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Wedia 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, Wedia recorded free cash flow worth 68% 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 we empathize with investors who find debt concerning, you should keep in mind that Wedia has net cash of €2.73m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 150% over the last year. So is Wedia's debt a risk? It doesn't seem so to us. 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 example - Wedia has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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