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Auditors Are Concerned About Wellard (ASX:WLD)

Simply Wall St

Unfortunately for shareholders, when Wellard Limited (ASX:WLD) reported results for the period to June 2019, its auditors, PricewaterhouseCoopers LLP, expressed uncertainty about whether it can continue as a going concern. This means that, based on the financial results to that date, the company arguably should raise capital, or otherwise strengthen the balance sheet, as soon as possible.

Given its situation, it may not be in a good position to raise capital on favorable terms. So it is suddenly extremely important to consider whether the company is taking too much risk on its balance sheet. The big consideration is whether it can repay its debt, since in the worst case scenario, creditors could force the company to bankruptcy.

View our latest analysis for Wellard

What Is Wellard's Net Debt?

The image below, which you can click on for greater detail, shows that Wellard had debt of AU$80.5m at the end of June 2019, a reduction from AU$144.9m over a year. On the flip side, it has AU$7.42m in cash leading to net debt of about AU$73.1m.

ASX:WLD Historical Debt, October 2nd 2019

How Strong Is Wellard's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wellard had liabilities of AU$142.5m due within 12 months and liabilities of AU$21.0k due beyond that. On the other hand, it had cash of AU$7.42m and AU$2.28m worth of receivables due within a year. So its liabilities total AU$132.8m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the AU$26.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt After all, Wellard would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Wellard'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.

In the last year Wellard's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Wellard produced an earnings before interest and tax (EBIT) loss. Indeed, it lost AU$2.2m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost AU$47m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky, like eating chicken you think might look too pink. We'd prefer pass. We prefer to avoid a company after its auditor has expressed any uncertainty about its ability to continue as a going concern. That's because companies should always make sure the auditor has confidence that the company will continue as a going concern, in our view. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Wellard's profit, revenue, and operating cashflow have changed over the last few years.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.