Is Whitbread (LON:WTB) 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.' 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. Importantly, Whitbread plc (LON:WTB) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Whitbread

What Is Whitbread's Debt?

The image below, which you can click on for greater detail, shows that Whitbread had debt of UK£992.7m at the end of September 2022, a reduction from UK£1.09b over a year. But on the other hand it also has UK£1.17b in cash, leading to a UK£182.1m net cash position.

A Look At Whitbread's Liabilities

We can see from the most recent balance sheet that Whitbread had liabilities of UK£755.8m falling due within a year, and liabilities of UK£4.80b due beyond that. Offsetting these obligations, it had cash of UK£1.17b as well as receivables valued at UK£138.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£4.24b.

This is a mountain of leverage relative to its market capitalization of UK£6.04b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Whitbread boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Whitbread made a loss at the EBIT level, last year, but improved that to positive EBIT of UK£388m in 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 Whitbread'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 company can only pay off debt with cold hard cash, not accounting profits. Whitbread may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Whitbread generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Whitbread does have more liabilities than liquid assets, it also has net cash of UK£182.1m. And it impressed us with free cash flow of UK£316m, being 81% of its EBIT. So we are not troubled with Whitbread's debt use. 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 1 warning sign for Whitbread you should know about.

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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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.