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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Wilhelmina International, Inc. (NASDAQ:WHLM) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Wilhelmina International's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2020 Wilhelmina International had debt of US$2.72m, up from US$2.00m in one year. However, it does have US$5.56m in cash offsetting this, leading to net cash of US$2.84m.
How Healthy Is Wilhelmina International's Balance Sheet?
The latest balance sheet data shows that Wilhelmina International had liabilities of US$10.1m due within a year, and liabilities of US$4.08m falling due after that. Offsetting these obligations, it had cash of US$5.56m as well as receivables valued at US$7.15m due within 12 months. So its liabilities total US$1.44m more than the combination of its cash and short-term receivables.
Given Wilhelmina International has a market capitalization of US$29.3m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Wilhelmina International also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Wilhelmina International'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 Wilhelmina International had a loss before interest and tax, and actually shrunk its revenue by 45%, to US$42m. To be frank that doesn't bode well.
So How Risky Is Wilhelmina International?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Wilhelmina International lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$2.1m and booked a US$4.9m accounting loss. With only US$2.84m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Wilhelmina International (of which 1 makes us a bit uncomfortable!) 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.
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. 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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