Western Bulk Chartering (OB:WEST) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Western Bulk Chartering AS (OB:WEST) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Western Bulk Chartering

How Much Debt Does Western Bulk Chartering Carry?

The image below, which you can click on for greater detail, shows that Western Bulk Chartering had debt of US$3.38m at the end of December 2021, a reduction from US$24.0m over a year. But it also has US$108.3m in cash to offset that, meaning it has US$104.9m net cash.

A Look At Western Bulk Chartering's Liabilities

The latest balance sheet data shows that Western Bulk Chartering had liabilities of US$144.6m due within a year, and liabilities of US$935.0k falling due after that. On the other hand, it had cash of US$108.3m and US$33.2m worth of receivables due within a year. So its liabilities total US$4.04m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Western Bulk Chartering's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$217.1m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Western Bulk Chartering boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Western Bulk Chartering grew its EBIT by 1,683% over twelve months. 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 you can't view debt in total isolation; since Western Bulk Chartering will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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 two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

We could understand if investors are concerned about Western Bulk Chartering's liabilities, but we can be reassured by the fact it has has net cash of US$104.9m. And it impressed us with free cash flow of US$98m, being 130% of its EBIT. So we don't think Western Bulk Chartering's use of debt is risky. 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. For example - Western Bulk Chartering has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.