Does WH Smith (LON:SMWH) Have A Healthy Balance Sheet?

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.' 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. Importantly, WH Smith PLC (LON:SMWH) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for WH Smith

How Much Debt Does WH Smith Carry?

You can click the graphic below for the historical numbers, but it shows that as of August 2020 WH Smith had UK£400.0m of debt, an increase on UK£215.0m, over one year. However, it does have UK£108.0m in cash offsetting this, leading to net debt of about UK£292.0m.

How Healthy Is WH Smith's Balance Sheet?

According to the last reported balance sheet, WH Smith had liabilities of UK£377.0m due within 12 months, and liabilities of UK£843.0m due beyond 12 months. Offsetting these obligations, it had cash of UK£108.0m as well as receivables valued at UK£57.0m due within 12 months. So its liabilities total UK£1.06b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because WH Smith is worth UK£1.90b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if WH Smith can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year WH Smith had a loss before interest and tax, and actually shrunk its revenue by 27%, to UK£1.0b. That makes us nervous, to say the least.

Caveat Emptor

Not only did WH Smith's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at UK£48m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of UK£239m. So to be blunt we do think it 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. Take risks, for example - WH Smith has 3 warning signs 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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