Is Wise Group (STO:WISE) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Wise Group AB (publ) (STO:WISE) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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.

Check out our latest analysis for Wise Group

What Is Wise Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Wise Group had kr25.0m of debt, an increase on kr11.5m, over one year. But on the other hand it also has kr41.4m in cash, leading to a kr16.4m net cash position.

A Look At Wise Group's Liabilities

According to the last reported balance sheet, Wise Group had liabilities of kr200.6m due within 12 months, and liabilities of kr111.2m due beyond 12 months. On the other hand, it had cash of kr41.4m and kr118.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr152.0m.

This deficit isn't so bad because Wise Group is worth kr272.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Wise Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Wise Group's EBIT was down 73% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 Wise Group 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Wise Group 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, Wise Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Wise Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of kr16.4m. The cherry on top was that in converted 180% of that EBIT to free cash flow, bringing in kr41m. So while Wise Group does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Wise Group is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

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. 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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