Does TheWorks.co.uk (LON:WRKS) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that TheWorks.co.uk plc (LON:WRKS) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for TheWorks.co.uk

What Is TheWorks.co.uk's Net Debt?

The image below, which you can click on for greater detail, shows that at October 2022 TheWorks.co.uk had debt of UK£4.00m, up from in one year. But on the other hand it also has UK£11.0m in cash, leading to a UK£6.97m net cash position.

How Healthy Is TheWorks.co.uk's Balance Sheet?

According to the last reported balance sheet, TheWorks.co.uk had liabilities of UK£95.0m due within 12 months, and liabilities of UK£81.9m due beyond 12 months. Offsetting this, it had UK£11.0m in cash and UK£10.8m in receivables that were due within 12 months. So its liabilities total UK£155.1m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the UK£20.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, TheWorks.co.uk would likely require a major re-capitalisation if it had to pay its creditors today. TheWorks.co.uk boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Notably, TheWorks.co.uk made a loss at the EBIT level, last year, but improved that to positive EBIT of UK£9.3m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if TheWorks.co.uk can strengthen its balance sheet over time. 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 TheWorks.co.uk 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 year, TheWorks.co.uk actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While TheWorks.co.uk does have more liabilities than liquid assets, it also has net cash of UK£6.97m. And it impressed us with free cash flow of UK£18m, being 195% of its EBIT. So while TheWorks.co.uk does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for TheWorks.co.uk that 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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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.