Warehouse Group (NZSE:WHS) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 The Warehouse Group Limited (NZSE:WHS) makes use of 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Warehouse Group

How Much Debt Does Warehouse Group Carry?

The image below, which you can click on for greater detail, shows that Warehouse Group had debt of NZ$27.1m at the end of August 2020, a reduction from NZ$133.4m over a year. However, its balance sheet shows it holds NZ$168.1m in cash, so it actually has NZ$141.0m net cash.

How Healthy Is Warehouse Group's Balance Sheet?

According to the last reported balance sheet, Warehouse Group had liabilities of NZ$626.3m due within 12 months, and liabilities of NZ$852.2m due beyond 12 months. On the other hand, it had cash of NZ$168.1m and NZ$84.3m worth of receivables due within a year. So it has liabilities totalling NZ$1.23b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's NZ$880.5m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that Warehouse Group has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Importantly, Warehouse Group grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Warehouse Group 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 Warehouse Group 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. Over the last three years, Warehouse Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Warehouse Group does have more liabilities than liquid assets, it also has net cash of NZ$141.0m. And it impressed us with free cash flow of NZ$343m, being 143% of its EBIT. So we are not troubled with Warehouse Group'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. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Warehouse Group you should know about.

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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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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