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Does Willamette Valley Vineyards (NASDAQ:WVVI) Have A Healthy Balance Sheet?

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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Willamette Valley Vineyards, Inc. (NASDAQ:WVVI) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Willamette Valley Vineyards

What Is Willamette Valley Vineyards's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Willamette Valley Vineyards had US$6.70m of debt in December 2021, down from US$7.22m, one year before. However, it does have US$13.7m in cash offsetting this, leading to net cash of US$7.05m.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Willamette Valley Vineyards' Liabilities

We can see from the most recent balance sheet that Willamette Valley Vineyards had liabilities of US$11.9m falling due within a year, and liabilities of US$14.5m due beyond that. On the other hand, it had cash of US$13.7m and US$3.30m worth of receivables due within a year. So it has liabilities totalling US$9.36m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Willamette Valley Vineyards has a market capitalization of US$44.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Willamette Valley Vineyards boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Willamette Valley Vineyards's load is not too heavy, because its EBIT was down 26% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. During the last three years, Willamette Valley Vineyards burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While Willamette Valley Vineyards does have more liabilities than liquid assets, it also has net cash of US$7.05m. So although we see some areas for improvement, we're not too worried about Willamette Valley Vineyards's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Willamette Valley Vineyards you should be aware of, and 1 of them can't be ignored.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.