Washington H. Soul Pattinson (ASX:SOL) Has A Rock Solid Balance Sheet

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Simply Wall St

Thu, May 12, 2022, 7:39 PM 4 min read

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Washington H. Soul Pattinson and Company Limited (ASX:SOL) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Washington H. Soul Pattinson

What Is Washington H. Soul Pattinson's Net Debt?

As you can see below, Washington H. Soul Pattinson had AU$669.9m of debt at January 2022, down from AU$864.3m a year prior. But on the other hand it also has AU$1.08b in cash, leading to a AU$410.1m net cash position.

debt-equity-history-analysis — ASX:SOL Debt to Equity History May 13th 2022

How Strong Is Washington H. Soul Pattinson's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Washington H. Soul Pattinson had liabilities of AU$531.2m due within 12 months and liabilities of AU$1.37b due beyond that. Offsetting these obligations, it had cash of AU$1.08b as well as receivables valued at AU$402.8m due within 12 months. So it has liabilities totalling AU$418.9m more than its cash and near-term receivables, combined.

Of course, Washington H. Soul Pattinson has a market capitalization of AU$9.51b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Washington H. Soul Pattinson also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Washington H. Soul Pattinson turned things around in the last 12 months, delivering and EBIT of AU$978m. 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 Washington H. Soul Pattinson's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Washington H. Soul Pattinson may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Washington H. Soul Pattinson generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about Washington H. Soul Pattinson's liabilities, but we can be reassured by the fact it has has net cash of AU$410.1m. And it impressed us with free cash flow of AU$795m, being 81% of its EBIT. So is Washington H. Soul Pattinson's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Washington H. Soul Pattinson that you should be aware of.

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.