Is Wavestone (EPA:WAVE) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Wavestone SA (EPA:WAVE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Wavestone

What Is Wavestone's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Wavestone had €52.1m of debt in September 2021, down from €60.2m, one year before. However, it does have €69.0m in cash offsetting this, leading to net cash of €16.9m.

A Look At Wavestone's Liabilities

Zooming in on the latest balance sheet data, we can see that Wavestone had liabilities of €134.8m due within 12 months and liabilities of €79.3m due beyond that. On the other hand, it had cash of €69.0m and €151.5m worth of receivables due within a year. So it can boast €6.37m more liquid assets than total liabilities.

Having regard to Wavestone's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €1.08b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Wavestone has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Wavestone has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Wavestone'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Wavestone 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 last three years, Wavestone recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Wavestone has net cash of €16.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €55m, being 82% of its EBIT. So we don't think Wavestone's use of debt is risky. 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. Case in point: We've spotted 1 warning sign for Wavestone you should be aware of.

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.