Here’s why Wallenius Wilhelmsen (OB:WAWI) has significant debt

Warren Buffett said: “Volatility is far from synonymous with risk. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We note that Wallenius Wilhelmsen ASA (OB:WAWI) has debt on its balance sheet. But does this debt worry shareholders?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we think about a company’s use of debt, we first look at cash and debt together.

See our latest analysis for Wallenius Wilhelmsen

What is Wallenius Wilhelmsen’s debt?

You can click on the chart below for historical numbers, but it shows that as of September 2021, Wallenius Wilhelmsen had $3.99 billion in debt, an increase of $2.73 billion, year-over-year . However, since it has a cash reserve of $587.0 million, its net debt is less, at around $3.40 billion.

OB: WAWI Debt to Equity March 7, 2022

A look at the responsibilities of Wallenius Wilhelmsen

According to the last published balance sheet, Wallenius Wilhelmsen had liabilities of $1.14 billion due within 12 months and liabilities of $3.68 billion due beyond 12 months. In compensation for these obligations, it had cash of US$587.0 million as well as receivables valued at US$385.0 million and maturing within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $3.85 billion.

Given that this deficit is actually greater than the company’s market capitalization of $2.85 billion, we think shareholders really should be watching Wallenius Wilhelmsen’s debt level, like a parent watching their child do. cycling for the first time. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price.

We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

Wallenius Wilhelmsen has a rather high debt-to-EBITDA ratio of 5.6, which suggests significant leverage. However, its interest coverage of 2.8 is reasonably strong, which is a good sign. However, shareholders should be reassured to remember that Wallenius Wilhelmsen has actually increased its EBIT by 4,271% over the past 12 months. If this earnings trend continues, it will make its leverage much more manageable in the future. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Wallenius Wilhelmsen’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a company can only repay its debts with cold hard cash, not with book profits. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Fortunately for all shareholders, Wallenius Wilhelmsen has actually produced more free cash flow than EBIT over the past three years. There’s nothing better than cash coming in to stay in your lenders’ good books.

Our point of view

We feel some apprehension about Wallenius Wilhelmsen’s challenging net debt to EBITDA ratio, but we also have positives to focus on. For example, its EBIT to free cash flow conversion and EBIT growth rate give us some confidence in its ability to manage its debt. From all the angles mentioned above, it seems to us that Wallenius Wilhelmsen is a bit risky investment because of its debt. This isn’t necessarily a bad thing, as leverage can increase return on equity, but it is something to be aware of. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. To do this, you need to find out about the 2 warning signs we spotted with Wallenius Wilhelmsen (including 1 which is concerning).

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

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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John A. Bogar