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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that George Weston Limited (TSE:WN) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for George Weston
What Is George Weston's Debt?
The chart below, which you can click on for greater detail, shows that George Weston had CA$16.4b in debt in June 2019; about the same as the year before. However, because it has a cash reserve of CA$2.14b, its net debt is less, at about CA$14.3b.
How Strong Is George Weston's Balance Sheet?
The latest balance sheet data shows that George Weston had liabilities of CA$9.33b due within a year, and liabilities of CA$24.6b falling due after that. Offsetting these obligations, it had cash of CA$2.14b as well as receivables valued at CA$4.59b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$27.2b.
The deficiency here weighs heavily on the CA$16.6b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, George Weston would probably need a major re-capitalization if its creditors were to demand repayment.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).