Is Weibo (NASDAQ:WB) A Risky Investment?

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.' 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. Importantly, Weibo Corporation (NASDAQ:WB) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Weibo

What Is Weibo's Debt?

As you can see below, Weibo had US$2.43b of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$3.13b in cash to offset that, meaning it has US$699.8m net cash.

How Strong Is Weibo's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Weibo had liabilities of US$2.16b due within 12 months and liabilities of US$1.67b due beyond that. Offsetting these obligations, it had cash of US$3.13b as well as receivables valued at US$1.57b due within 12 months. So it actually has US$877.3m more liquid assets than total liabilities.

This surplus suggests that Weibo has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Weibo boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Weibo has boosted its EBIT by 38%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Weibo can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Weibo 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. Happily for any shareholders, Weibo actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Weibo has US$699.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$646m, being 109% of its EBIT. So is Weibo's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Weibo that you should be aware of before investing here.

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.

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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.