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Is Weibo (NASDAQ:WB) Using Too Much Debt?

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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Weibo Corporation (NASDAQ:WB) does carry debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Weibo

What Is Weibo's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Weibo had debt of US$2.42b, up from US$1.68b in one year. But on the other hand it also has US$3.50b in cash, leading to a US$1.08b net cash position.

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

How Strong Is Weibo's Balance Sheet?

We can see from the most recent balance sheet that Weibo had liabilities of US$958.4m falling due within a year, and liabilities of US$2.49b due beyond that. Offsetting these obligations, it had cash of US$3.50b as well as receivables valued at US$1.04b due within 12 months. So it actually has US$1.09b more liquid assets than total liabilities.

This surplus suggests that Weibo has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Weibo boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Weibo's EBIT dived 15%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Weibo's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Weibo 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. Looking at the most recent three years, Weibo recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Weibo has net cash of US$1.08b, as well as more liquid assets than liabilities. So we don't have any problem with Weibo's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Weibo .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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