The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Wonderla Holidays Limited (NSE:WONDERLA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Wonderla Holidays

What Is Wonderla Holidays's Net Debt?

As you can see below, at the end of March 2019, Wonderla Holidays had ₹9.87m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds ₹928.8m in cash, so it actually has ₹918.9m net cash.

How Strong Is Wonderla Holidays's Balance Sheet?

According to the last reported balance sheet, Wonderla Holidays had liabilities of ₹845.1m due within 12 months, and liabilities of ₹712.7m due beyond 12 months. Offsetting these obligations, it had cash of ₹928.8m as well as receivables valued at ₹24.8m due within 12 months. So it has liabilities totalling ₹604.2m more than its cash and near-term receivables, combined.

Since publicly traded Wonderla Holidays shares are worth a total of ₹14.0b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Wonderla Holidays boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Wonderla Holidays has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. 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 Wonderla Holidays'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Wonderla Holidays has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last three years, Wonderla Holidays actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for and improvement.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Wonderla Holidays has ₹919m in net cash. And we liked the look of last year's 36% year-on-year EBIT growth. So we are not troubled with Wonderla Holidays's debt use. We'd be motivated to research the stock further if we found out that Wonderla Holidays insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.