Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note thatWeibo Corporation(NASDAQ:WB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for WeiboWhat Is Weibo's Net Debt?
As you can see below, at the end of June 2021, Weibo had US$2.43b of debt, up from US$1.68b a year ago. Click the image for more detail. However, it does have US$2.94b in cash offsetting this, leading to net cash of US$504.2m.NasdaqGS:WB Debt to Equity History September 8th 2021A Look At Weibo's Liabilities
We can see from the most recent balance sheet that Weibo had liabilities of US$1.09b falling due within a year, and liabilities of US$2.50b due beyond that. Offsetting these obligations, it had cash of US$2.94b as well as receivables valued at US$1.13b due within 12 months. So it actually has US$470.6mmoreliquid assets than total liabilities.
This short term liquidity is a sign that Weibo could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Weibo boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Weibo grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Weibo can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Weibo 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 last three years, Weibo actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.Summing up
While it is always sensible to investigate a company's debt, in this case Weibo has US$504.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$707m, being 106% of its EBIT. So is Weibo's debt a risk? It doesn't seem so to us. 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.We've identified 3 warning signswith Weibo , and understanding them should be part of your investment process.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out thisfreelist of growing businesses that have net cash on the balance sheet.
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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