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 Wilhelmina International, Inc. (NASDAQ:WHLM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. 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?
As you can see below, at the end of March 2019, Wilhelmina International had US$2.68m of debt, up from US$2.02m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$6.26m in cash, so it actually has US$3.58m net cash.
How Healthy Is Wilhelmina International’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Wilhelmina International had liabilities of US$16.2m due within 12 months and liabilities of US$3.73m due beyond that. Offsetting these obligations, it had cash of US$6.26m as well as receivables valued at US$12.9m due within 12 months. So its liabilities total US$781.0k more than the combination of its cash and short-term receivables.
Since publicly traded Wilhelmina International shares are worth a total of US$29.5m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. Wilhelmina International boasts net cash, so it’s fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, Wilhelmina International turned things around in the last 12 months, delivering and EBIT of US$1.0m. The balance sheet is clearly the area to focus on when you are analysing debt. 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Wilhelmina International 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. Happily for any shareholders, Wilhelmina International actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
We could understand if investors are concerned about Wilhelmina International’s liabilities, but we can be reassured by the fact it has has net cash of US$3.6m. And it impressed us with free cash flow of US$3.6m, being 347% of its EBIT. So is Wilhelmina International’s debt a risk? It doesn’t seem so to us. Of course, we wouldn’t say no to the extra confidence that we’d gain if we knew that Wilhelmina International insiders have been buying shares: if you’re on the same wavelength, you can find out if insiders are buying by clicking this link.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
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