Does Worth Peripherals (NSE:WORTH) Have A Healthy Balance Sheet?

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. As with many other companies Worth Peripherals Limited (NSE:WORTH) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Worth Peripherals

What Is Worth Peripherals's Net Debt?

As you can see below, Worth Peripherals had ₹198.1m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₹230.7m in cash, so it actually has ₹32.6m net cash.

How Healthy Is Worth Peripherals' Balance Sheet?

According to the last reported balance sheet, Worth Peripherals had liabilities of ₹158.9m due within 12 months, and liabilities of ₹266.9m due beyond 12 months. Offsetting this, it had ₹230.7m in cash and ₹352.9m in receivables that were due within 12 months. So it actually has ₹157.7m more liquid assets than total liabilities.

This surplus suggests that Worth Peripherals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Worth Peripherals has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Worth Peripherals grew its EBIT by 17% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Worth Peripherals's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Worth Peripherals 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. Over the last three years, Worth Peripherals recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Worth Peripherals has net cash of ₹32.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 17% year-on-year EBIT growth. So we don't have any problem with Worth Peripherals's use of debt. 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. Case in point: We've spotted 3 warning signs for Worth Peripherals 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. 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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