Is Wallenius Wilhelmsen (OB:WAWI) a risky investment?
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Wallenius Wilhelmsen ASA (OB:WAWI) uses debt. But the more important question is: what risk does this debt create?
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. 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.
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What is Wallenius Wilhelmsen’s debt?
As you can see below, Wallenius Wilhelmsen was $2.56 billion in debt as of June 2022, roughly the same as the year before. You can click on the graph for more details. However, since it has a cash reserve of $821.0 million, its net debt is less, at around $1.74 billion.
How strong is Wallenius Wilhelmsen’s balance sheet?
The latest balance sheet data shows that Wallenius Wilhelmsen had liabilities of $2.12 billion due within the year, and liabilities of $2.91 billion due thereafter. On the other hand, it had cash of 821.0 million dollars and 570.0 million dollars of receivables within one year. Thus, its liabilities total $3.64 billion more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the $2.34 billion business itself, like a child struggling under the weight of a huge backpack full of books, his gym gear and a trumpet. . We would therefore be watching his balance sheet closely, no doubt. After all, Wallenius Wilhelmsen would likely need a major recapitalization if he were to pay his creditors today.
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). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Wallenius Wilhelmsen has net debt worth 1.9x EBITDA, which isn’t too much, but its interest coverage looks a bit low, with EBIT at just 3.0x interest expense. interests. While that doesn’t worry us too much, it does suggest that interest payments are a bit of a burden. Notably, Wallenius Wilhelmsen’s EBIT outperformed Elon Musk’s, gaining 314% from a year ago. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Wallenius Wilhelmsen can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, a company can only repay its debts with cold hard cash, not with book profits. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Wallenius Wilhelmsen has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Our point of view
While Wallenius Wilhelmsen’s total passive level makes us nervous. The EBIT to free cash flow conversion and the EBIT growth rate were encouraging signs. 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, since 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. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 1 warning sign for Wallenius Wilhelmsen you should be aware.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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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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