Western Digital (NASDAQ:WDC) Is Carrying A Fair Bit Of 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.' 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. As with many other companies Western Digital Corporation (NASDAQ:WDC) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Western Digital

What Is Western Digital's Debt?

As you can see below, at the end of September 2023, Western Digital had US$7.67b of debt, up from US$7.07b a year ago. Click the image for more detail. However, because it has a cash reserve of US$2.03b, its net debt is less, at about US$5.64b.

A Look At Western Digital's Liabilities

The latest balance sheet data shows that Western Digital had liabilities of US$5.79b due within a year, and liabilities of US$7.22b falling due after that. Offsetting this, it had US$2.03b in cash and US$1.45b in receivables that were due within 12 months. So it has liabilities totalling US$9.53b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its very significant market capitalization of US$15.2b, so it does suggest shareholders should keep an eye on Western Digital's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Western Digital can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Western Digital made a loss at the EBIT level, and saw its revenue drop to US$11b, which is a fall of 35%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Western Digital's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$1.8b 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. Another cause for caution is that is bled US$1.7b in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Western Digital has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.