Wikana (WSE: WIK) seems to use debt quite wisely
David Iben put it well when he said, âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Above all, Wikana SA (WSE: WIK) carries the debt. But the most important question is: what risk does this debt create?
When is Debt a Problem?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a business’s debt levels is to consider its cash flow and debt together.
Check out our latest review for Wikana
What is Wikana’s net debt?
The image below, which you can click for more details, shows Wikana owed Z47.6million at the end of September 2021, a reduction of Z70.8million over one year. On the other hand, he has Z14.2million in cash, resulting in net debt of around Z33.4million.
How strong is Wikana’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Wikana had a z77.2million liability due within 12 months and z55.3million liabilities due beyond. In return, he had z14.2 million in cash and z10.3 million in receivables due within 12 months. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by z 108.0 million.
When you consider that this shortfall exceeds the company’s z78.6million market cap, you might well be inclined to take a close look at the balance sheet. In the event that the company were to clean up its balance sheet quickly, it seems likely that shareholders would suffer significant dilution.
We measure a company’s indebtedness relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). Thus, we look at debt versus earnings with and without amortization expenses.
Wikana has a low net debt to EBITDA ratio of just 0.69. And its EBIT easily covers its interest costs, being 15.7 times greater. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Best of all, Wikana increased its EBIT by 863% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in the years to come. The balance sheet is clearly the area to focus on when analyzing debt. But it is Wikana’s results that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Wikana has recorded free cash flow of 74% of its EBIT, which is close to normal, as free cash flow excludes interest and taxes. This free cash flow puts the business in a good position to repay debt, if any.
Our point of view
Fortunately, Wikana’s impressive interest coverage means it has the upper hand on its debt. But we have to admit that we find that his total liability level has the opposite effect. All these things considered, it looks like Wikana can comfortably manage her current level of debt. On the plus side, this leverage can increase returns to shareholders, but the potential downside is more risk of loss, so it’s worth watching the balance sheet. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – far from it. We have identified 4 warning signs with Wikana and understanding them should be part of your investment process.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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