Yahoo Finance Is Whitbread (LON:WTB) A Risky Investment?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Whitbread plc (LON:WTB) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Whitbread
What Is Whitbread's Debt?
You can click the graphic below for the historical numbers, but it shows that as of August 2021 Whitbread had UK£1.09b of debt, an increase on UK£747.3m, over one year. But it also has UK£1.14b in cash to offset that, meaning it has UK£59.0m net cash.
A Look At Whitbread's Liabilities
Zooming in on the latest balance sheet data, we can see that Whitbread had liabilities of UK£723.3m due within 12 months and liabilities of UK£4.32b due beyond that. On the other hand, it had cash of UK£1.14b and UK£120.8m worth of receivables due within a year. So its liabilities total UK£3.78b more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of UK£5.98b, so it does suggest shareholders should keep an eye on Whitbread's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Whitbread boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Whitbread'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.
In the last year Whitbread had a loss before interest and tax, and actually shrunk its revenue by 19%, to UK£1.0b. That's not what we would hope to see.
So How Risky Is Whitbread?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Whitbread lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of UK£55m and booked a UK£284m accounting loss. Given it only has net cash of UK£59.0m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Whitbread insider transactions.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
