Is Wilmar International (SGX: F34) a risky investment?


Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We note that Wilmar International Limited (SGX: F34) has debt on its balance sheet. But should shareholders be concerned about its use of debt?

What risk does debt entail?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first look at cash and debt levels together.

Check out our latest review for Wilmar International

How much debt does Wilmar International have?

As you can see below, at the end of June 2021, Wilmar International was in debt of US $ 28.2 billion, up from US $ 24.6 billion a year ago. Click on the image for more details. However, it has $ 7.35 billion in cash offsetting that, leading to net debt of around $ 20.9 billion.

SGX: F34 Debt to equity history September 25, 2021

A look at the responsibilities of Wilmar International

According to the latest published balance sheet, Wilmar International had liabilities of US $ 26.3 billion due within 12 months and liabilities of US $ 7.67 billion due beyond 12 months. In return, he had $ 7.35 billion in cash and $ 9.03 billion in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 17.6 billion.

That’s a mountain of leverage, even compared to its gargantuan market cap of US $ 19.1 billion. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.

Oddly enough, Wilmar International has a very high EBITDA ratio of 6.0, which implies high debt, but high interest coverage of 23.9. So either he has access to very cheap long-term debt or his interest charges will go up! One way for Wilmar International to beat its debt would be to stop borrowing more but continue to increase its EBIT by around 18%, as it did last year. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Wilmar International’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 analyst earnings forecast report interesting.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Wilmar International has recorded substantial total negative free cash flow. While this may be the result of spending on growth, it makes debt much riskier.

Our point of view

To be frank, Wilmar International’s net debt to EBITDA and track record of converting EBIT to free cash flow makes us rather uncomfortable with its debt levels. But on the bright side, his interest coverage is a good sign and makes us more optimistic. Once we consider all of the above factors together it seems to us that Wilmar International’s debt makes it a bit risky. Some people like this kind of risk, but we are aware of the potential pitfalls, so we would probably prefer him to carry less debt. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 2 warning signs for Wilmar International (1 is significant!) That you should know before investing here.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St does not have any position in the mentioned stocks.
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