Is Wilson Learning Worldwide (TYO:9610) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Wilson Learning Worldwide Inc. (TYO:9610) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Wilson Learning Worldwide

What Is Wilson Learning Worldwide's Debt?

As you can see below, at the end of September 2020, Wilson Learning Worldwide had JP¥331.0m of debt, up from JP¥151.0m a year ago. Click the image for more detail. However, it does have JP¥1.34b in cash offsetting this, leading to net cash of JP¥1.00b.

A Look At Wilson Learning Worldwide's Liabilities

Zooming in on the latest balance sheet data, we can see that Wilson Learning Worldwide had liabilities of JP¥592.0m due within 12 months and liabilities of JP¥278.0m due beyond that. On the other hand, it had cash of JP¥1.34b and JP¥180.0m worth of receivables due within a year. So it actually has JP¥645.0m more liquid assets than total liabilities.

This luscious liquidity implies that Wilson Learning Worldwide's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that Wilson Learning Worldwide has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Wilson Learning Worldwide will need earnings to service that debt. 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.

Over 12 months, Wilson Learning Worldwide made a loss at the EBIT level, and saw its revenue drop to JP¥1.8b, which is a fall of 37%. To be frank that doesn't bode well.

So How Risky Is Wilson Learning Worldwide?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Wilson Learning Worldwide had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through JP¥688m of cash and made a loss of JP¥1.1b. While this does make the company a bit risky, it's important to remember it has net cash of JP¥1.00b. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Wilson Learning Worldwide you should be aware of, and 1 of them is a bit concerning.

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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