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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Ocean Wilsons Holdings Limited (LON:OCN) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Ocean Wilsons Holdings
What Is Ocean Wilsons Holdings's Debt?
As you can see below, Ocean Wilsons Holdings had US$334.5m of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$364.4m in cash, leading to a US$29.9m net cash position.
How Healthy Is Ocean Wilsons Holdings's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Ocean Wilsons Holdings had liabilities of US$124.9m due within 12 months and liabilities of US$482.7m due beyond that. Offsetting these obligations, it had cash of US$364.4m as well as receivables valued at US$66.9m due within 12 months. So its liabilities total US$176.3m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Ocean Wilsons Holdings is worth US$407.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Ocean Wilsons Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
Sadly, Ocean Wilsons Holdings's EBIT actually dropped 3.1% in the last year. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. 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 Ocean Wilsons Holdings 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.