Would Westlife Development (NSE:WESTLIFE) Be Better Off With Less 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.' 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, Westlife Development Limited (NSE:WESTLIFE) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Westlife Development

What Is Westlife Development's Debt?

As you can see below, Westlife Development had ₹1.55b of debt at September 2020, down from ₹1.77b a year prior. However, because it has a cash reserve of ₹77.7m, its net debt is less, at about ₹1.47b.

A Look At Westlife Development's Liabilities

The latest balance sheet data shows that Westlife Development had liabilities of ₹4.33b due within a year, and liabilities of ₹8.33b falling due after that. Offsetting these obligations, it had cash of ₹77.7m as well as receivables valued at ₹558.8m due within 12 months. So it has liabilities totalling ₹12.0b more than its cash and near-term receivables, combined.

Of course, Westlife Development has a market capitalization of ₹80.8b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Westlife Development'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.

In the last year Westlife Development had a loss before interest and tax, and actually shrunk its revenue by 38%, to ₹9.7b. To be frank that doesn't bode well.

Caveat Emptor

While Westlife Development'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 ₹884m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 ₹1.2b. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Westlife Development .

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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