The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Wilhelmina International, Inc. (NASDAQ:WHLM) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.
What Is Wilhelmina International's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Wilhelmina International had US$3.41m of debt, an increase on US$2.19m, over one year. But it also has US$4.95m in cash to offset that, meaning it has US$1.54m net cash.
How Strong Is Wilhelmina International's Balance Sheet?
We can see from the most recent balance sheet that Wilhelmina International had liabilities of US$11.5m falling due within a year, and liabilities of US$3.09m due beyond that. Offsetting these obligations, it had cash of US$4.95m as well as receivables valued at US$6.99m due within 12 months. So its liabilities total US$2.64m more than the combination of its cash and short-term receivables.
Given Wilhelmina International has a market capitalization of US$23.1m, 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, Wilhelmina International boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Wilhelmina International's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Wilhelmina International had a loss before interest and tax, and actually shrunk its revenue by 37%, to US$48m. That makes us nervous, to say the least.
So How Risky Is Wilhelmina International?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Wilhelmina International had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$1.7m of cash and made a loss of US$10m. With only US$1.54m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Wilhelmina International (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.
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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