Is Willdan Group (NASDAQ:WLDN) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Willdan Group, Inc. (NASDAQ:WLDN) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

View our latest analysis for Willdan Group

What Is Willdan Group's Debt?

As you can see below, Willdan Group had US$100.6m of debt at December 2021, down from US$113.8m a year prior. However, it does have US$11.2m in cash offsetting this, leading to net debt of about US$89.4m.

How Healthy Is Willdan Group's Balance Sheet?

According to the last reported balance sheet, Willdan Group had liabilities of US$117.2m due within 12 months, and liabilities of US$98.0m due beyond 12 months. Offsetting this, it had US$11.2m in cash and US$132.8m in receivables that were due within 12 months. So it has liabilities totalling US$71.2m more than its cash and near-term receivables, combined.

Given Willdan Group has a market capitalization of US$368.2m, 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Willdan Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Willdan Group had a loss before interest and tax, and actually shrunk its revenue by 9.6%, to US$354m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Willdan Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$8.7m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$8.4m into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Willdan Group is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

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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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.