Is Werth-Holz (WSE:WHH) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Werth-Holz S.A. (WSE:WHH) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Werth-Holz

What Is Werth-Holz's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Werth-Holz had zł13.5m of debt, an increase on zł7.59m, over one year. On the flip side, it has zł1.79m in cash leading to net debt of about zł11.8m.

How Healthy Is Werth-Holz's Balance Sheet?

The latest balance sheet data shows that Werth-Holz had liabilities of zł13.5m due within a year, and liabilities of zł7.37m falling due after that. Offsetting this, it had zł1.79m in cash and zł2.95m in receivables that were due within 12 months. So it has liabilities totalling zł16.1m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Werth-Holz is worth zł35.8m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Werth-Holz's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Werth-Holz had a loss before interest and tax, and actually shrunk its revenue by 47%, to zł28m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Werth-Holz's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost zł1.3m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through zł1.8m of cash over the last year. So suffice it to say we consider the stock very 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. Case in point: We've spotted 2 warning signs for Werth-Holz 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.