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Here's Why Willamette Valley Vineyards (NASDAQ:WVVI) Has A Meaningful Debt Burden

·4 min read

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.' 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. We note that Willamette Valley Vineyards, Inc. (NASDAQ:WVVI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Willamette Valley Vineyards

How Much Debt Does Willamette Valley Vineyards Carry?

The image below, which you can click on for greater detail, shows that Willamette Valley Vineyards had debt of US$6.83m at the end of September 2021, a reduction from US$7.35m over a year. However, it does have US$13.9m in cash offsetting this, leading to net cash of US$7.06m.


How Healthy Is Willamette Valley Vineyards' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Willamette Valley Vineyards had liabilities of US$10.7m due within 12 months and liabilities of US$12.6m due beyond that. Offsetting this, it had US$13.9m in cash and US$2.36m in receivables that were due within 12 months. So it has liabilities totalling US$7.02m more than its cash and near-term receivables, combined.

Since publicly traded Willamette Valley Vineyards shares are worth a total of US$73.7m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Willamette Valley Vineyards boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Willamette Valley Vineyards's EBIT dived 12%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Willamette Valley Vineyards will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Willamette Valley Vineyards has US$7.06m in net cash. 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 4 warning signs for Willamette Valley Vineyards you should be aware of, and 1 of them shouldn't be ignored.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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