Is J D Wetherspoon (LON:JDW) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 J D Wetherspoon plc (LON:JDW) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for J D Wetherspoon

What Is J D Wetherspoon's Debt?

The image below, which you can click on for greater detail, shows that at January 2021 J D Wetherspoon had debt of UK£1.08b, up from UK£900.6m in one year. However, because it has a cash reserve of UK£225.0m, its net debt is less, at about UK£857.7m.

A Look At J D Wetherspoon's Liabilities

The latest balance sheet data shows that J D Wetherspoon had liabilities of UK£267.6m due within a year, and liabilities of UK£1.63b falling due after that. Offsetting this, it had UK£225.0m in cash and UK£1.46m in receivables that were due within 12 months. So it has liabilities totalling UK£1.67b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's UK£1.53b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine J D Wetherspoon'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.

Over 12 months, J D Wetherspoon made a loss at the EBIT level, and saw its revenue drop to UK£760m, which is a fall of 59%. To be frank that doesn't bode well.

Caveat Emptor

While J D Wetherspoon's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost UK£81m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of UK£202m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for J D Wetherspoon (of which 1 can't be ignored!) you should know about.

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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This article by Simply Wall St is general in nature. 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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