Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 that Wolverine World Wide, Inc. (NYSE:WWW) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Wolverine World Wide's Debt?
You can click the graphic below for the historical numbers, but it shows that Wolverine World Wide had US$814.7m of debt in June 2024, down from US$1.11b, one year before. However, it also had US$148.3m in cash, and so its net debt is US$666.4m.
How Healthy Is Wolverine World Wide's Balance Sheet?
According to the last reported balance sheet, Wolverine World Wide had liabilities of US$665.6m due within 12 months, and liabilities of US$860.3m due beyond 12 months. Offsetting this, it had US$148.3m in cash and US$272.2m in receivables that were due within 12 months. So it has liabilities totalling US$1.11b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of US$1.28b, so it does suggest shareholders should keep an eye on Wolverine World Wide's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Wolverine World Wide's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Wolverine World Wide made a loss at the EBIT level, and saw its revenue drop to US$1.9b, which is a fall of 26%. That makes us nervous, to say the least.
Caveat Emptor
While Wolverine World Wide's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$22m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of US$83m. So we do think this stock is quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Wolverine World Wide (including 1 which is a bit unpleasant) .
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
