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 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. As with many other companies Weis Markets, Inc. (NYSE:WMK) makes use of debt. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Weis Markets's Net Debt?
As you can see below, at the end of March 2022, Weis Markets had US$203.7m of debt, up from none a year ago. Click the image for more detail. But it also has US$291.8m in cash to offset that, meaning it has US$88.1m net cash.
How Strong Is Weis Markets' Balance Sheet?
According to the last reported balance sheet, Weis Markets had liabilities of US$328.8m due within 12 months, and liabilities of US$330.7m due beyond 12 months. On the other hand, it had cash of US$291.8m and US$47.3m worth of receivables due within a year. So its liabilities total US$320.3m more than the combination of its cash and short-term receivables.
Given Weis Markets has a market capitalization of US$2.13b, 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, Weis Markets also has more cash than debt, so we're pretty confident it can manage its debt safely.
Fortunately, Weis Markets grew its EBIT by 8.1% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Weis Markets'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Weis Markets 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. Over the most recent three years, Weis Markets recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Although Weis Markets's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$88.1m. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in US$114m. So we don't think Weis Markets's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Weis Markets, you may well want to click here to check an interactive graph of its earnings per share history.
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.
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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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