We Think Willamette Valley Vineyards (NASDAQ:WVVI) Is Taking Some Risk With Its Debt

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, Willamette Valley Vineyards, Inc. (NASDAQ:WVVI) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Willamette Valley Vineyards

What Is Willamette Valley Vineyards's Net Debt?

The image below, which you can click on for greater detail, shows that Willamette Valley Vineyards had debt of US$6.83m at the end of September 2021, a reduction from US$7.35m over a year. However, it does have US$13.9m in cash offsetting this, leading to net cash of US$7.06m.

How Strong Is Willamette Valley Vineyards' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Willamette Valley Vineyards had liabilities of US$10.7m due within 12 months and liabilities of US$12.6m due beyond that. Offsetting these obligations, it had cash of US$13.9m as well as receivables valued at US$2.36m due within 12 months. So it has liabilities totalling US$7.02m more than its cash and near-term receivables, combined.

Given Willamette Valley Vineyards has a market capitalization of US$47.7m, 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, Willamette Valley Vineyards boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Willamette Valley Vineyards's EBIT dived 12%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Willamette Valley Vineyards's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Willamette Valley Vineyards 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. Over the last three years, Willamette Valley Vineyards saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

Although Willamette Valley Vineyards's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$7.06m. So while Willamette Valley Vineyards does not have a great balance sheet, it's certainly not too bad. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Willamette Valley Vineyards (of which 1 is a bit concerning!) you should know about.

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.