money Wynnstay Group (LON:WYN) Has A Pretty Healthy Balance Sheet
Warren Buffett famously said, '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 can see that Wynnstay Group Plc (LON:WYN) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Wynnstay Group
What Is Wynnstay Group's Debt?
As you can see below, Wynnstay Group had UK£3.04m of debt at October 2019, down from UK£5.01m a year prior. However, it does have UK£10.6m in cash offsetting this, leading to net cash of UK£7.57m.
A Look At Wynnstay Group's Liabilities
Zooming in on the latest balance sheet data, we can see that Wynnstay Group had liabilities of UK£66.7m due within 12 months and liabilities of UK£3.51m due beyond that. On the other hand, it had cash of UK£10.6m and UK£68.3m worth of receivables due within a year. So it can boast UK£8.71m more liquid assets than total liabilities.
This surplus suggests that Wynnstay Group is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Wynnstay Group boasts net cash, so it's fair to say it does not have a heavy debt load!
But the bad news is that Wynnstay Group has seen its EBIT plunge 18% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Wynnstay Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Wynnstay 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. In the last three years, Wynnstay Group's free cash flow amounted to 48% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
Summing up
While it is always sensible to investigate a company's debt, in this case Wynnstay Group has UK£7.57m in net cash and a decent-looking balance sheet. So we don't have any problem with Wynnstay Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Wynnstay Group you should know about.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
