Is Western Bulk Chartering (OB:WEST) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Western Bulk Chartering AS (OB:WEST) makes use of 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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

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What Is Western Bulk Chartering's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Western Bulk Chartering had US$9.94m of debt in June 2022, down from US$18.2m, one year before. However, its balance sheet shows it holds US$53.5m in cash, so it actually has US$43.6m net cash.

A Look At Western Bulk Chartering's Liabilities

According to the last reported balance sheet, Western Bulk Chartering had liabilities of US$164.6m due within 12 months, and liabilities of US$723.0k due beyond 12 months. On the other hand, it had cash of US$53.5m and US$59.6m worth of receivables due within a year. So it has liabilities totalling US$52.2m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Western Bulk Chartering has a market capitalization of US$118.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Western Bulk Chartering also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Western Bulk Chartering grew its EBIT by 400% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Western Bulk Chartering 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. Western Bulk Chartering 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. Happily for any shareholders, Western Bulk Chartering actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Western Bulk Chartering's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$43.6m. The cherry on top was that in converted 130% of that EBIT to free cash flow, bringing in US$115m. So we don't think Western Bulk Chartering's use of debt is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with Western Bulk Chartering (including 1 which is significant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.