Willamette Valley Vineyards (NASDAQ:WVVI) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Willamette Valley Vineyards, Inc. (NASDAQ:WVVI) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Willamette Valley Vineyards

How Much Debt Does Willamette Valley Vineyards Carry?

As you can see below, Willamette Valley Vineyards had US$6.96m of debt at June 2021, down from US$7.48m a year prior. But it also has US$13.1m in cash to offset that, meaning it has US$6.15m net cash.

How Strong Is Willamette Valley Vineyards' Balance Sheet?

We can see from the most recent balance sheet that Willamette Valley Vineyards had liabilities of US$5.53m falling due within a year, and liabilities of US$12.8m due beyond that. On the other hand, it had cash of US$13.1m and US$2.60m worth of receivables due within a year. So its liabilities total US$2.62m more than the combination of its cash and short-term receivables.

Given Willamette Valley Vineyards has a market capitalization of US$72.8m, 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. While it does have liabilities worth noting, Willamette Valley Vineyards also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Willamette Valley Vineyards has increased its EBIT by 2.0% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. 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, a company can only pay off debt with cold hard cash, not accounting profits. While Willamette Valley Vineyards 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. Considering the last three years, Willamette Valley Vineyards actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

We could understand if investors are concerned about Willamette Valley Vineyards's liabilities, but we can be reassured by the fact it has has net cash of US$6.15m. And it also grew its EBIT by 2.0% over the last year. So we don't have any problem with Willamette Valley Vineyards'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. Be aware that Willamette Valley Vineyards is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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