Western Bulk Chartering (OB:WEST) Has A Pretty 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.' 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. As with many other companies Western Bulk Chartering AS (OB:WEST) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Western Bulk Chartering

What Is Western Bulk Chartering's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Western Bulk Chartering had debt of US$13.0m, up from US$9.94m in one year. However, its balance sheet shows it holds US$47.1m in cash, so it actually has US$34.0m net cash.

A Look At Western Bulk Chartering's Liabilities

We can see from the most recent balance sheet that Western Bulk Chartering had liabilities of US$87.1m falling due within a year, and liabilities of US$357.0k due beyond that. Offsetting this, it had US$47.1m in cash and US$23.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$17.1m.

This deficit isn't so bad because Western Bulk Chartering is worth US$76.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Western Bulk Chartering boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Western Bulk Chartering's saving grace is its low debt levels, because its EBIT has tanked 73% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Western Bulk Chartering 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. Happily for any shareholders, Western Bulk Chartering actually produced more free cash flow than EBIT over the last three 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$34.0m. And it impressed us with free cash flow of US$19m, being 121% of its EBIT. So we are not troubled with Western Bulk Chartering's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Western Bulk Chartering (of which 1 is a bit unpleasant!) you should know about.

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.