Is Wistron NeWeb (TWSE:6285) A Risky Investment?

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. We note that Wistron NeWeb Corporation (TWSE:6285) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Wistron NeWeb

What Is Wistron NeWeb's Net Debt?

The image below, which you can click on for greater detail, shows that Wistron NeWeb had debt of NT$11.5b at the end of March 2024, a reduction from NT$16.0b over a year. But on the other hand it also has NT$13.9b in cash, leading to a NT$2.34b net cash position.

A Look At Wistron NeWeb's Liabilities

We can see from the most recent balance sheet that Wistron NeWeb had liabilities of NT$34.3b falling due within a year, and liabilities of NT$3.65b due beyond that. Offsetting these obligations, it had cash of NT$13.9b as well as receivables valued at NT$21.2b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$2.89b.

Given Wistron NeWeb has a market capitalization of NT$60.4b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Wistron NeWeb boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Wistron NeWeb has been able to increase its EBIT by 20% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Wistron NeWeb 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 Wistron NeWeb 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. During the last three years, Wistron NeWeb burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Wistron NeWeb has NT$2.34b in net cash. And it impressed us with its EBIT growth of 20% over the last year. So we don't have any problem with Wistron NeWeb's use of debt. 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. For instance, we've identified 2 warning signs for Wistron NeWeb that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com