Warren Buffett famously said, '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. We note that Wayside Technology Group, Inc. (NASDAQ:WSTG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Wayside Technology Group Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2022 Wayside Technology Group had US$2.07m of debt, an increase on none, over one year. However, it does have US$29.3m in cash offsetting this, leading to net cash of US$27.3m.
How Healthy Is Wayside Technology Group's Balance Sheet?
The latest balance sheet data shows that Wayside Technology Group had liabilities of US$119.9m due within a year, and liabilities of US$4.69m falling due after that. Offsetting this, it had US$29.3m in cash and US$115.0m in receivables that were due within 12 months. So it actually has US$19.7m more liquid assets than total liabilities.
It's good to see that Wayside Technology Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Wayside Technology Group has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that Wayside Technology Group has boosted its EBIT by 68%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Wayside Technology Group'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Wayside Technology Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Wayside Technology Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While we empathize with investors who find debt concerning, you should keep in mind that Wayside Technology Group has net cash of US$27.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 162% of that EBIT to free cash flow, bringing in US$6.1m. The bottom line is that we do not find Wayside Technology Group's debt levels at all concerning. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Wayside Technology Group , and understanding them should be part of your investment process.
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.
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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.
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