Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Westrock Coffee Company (NASDAQ:WEST) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Westrock Coffee Carry?

As you can see below, at the end of June 2024, Westrock Coffee had US$474.0m of debt, up from US$331.7m a year ago. Click the image for more detail. However, it does have US$24.3m in cash offsetting this, leading to net debt of about US$449.6m.

A Look At Westrock Coffee's Liabilities

Zooming in on the latest balance sheet data, we can see that Westrock Coffee had liabilities of US$253.9m due within 12 months and liabilities of US$446.9m due beyond that. Offsetting these obligations, it had cash of US$24.3m as well as receivables valued at US$102.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$574.4m.

This is a mountain of leverage relative to its market capitalization of US$609.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Westrock Coffee'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.

In the last year Westrock Coffee had a loss before interest and tax, and actually shrunk its revenue by 5.9%, to US$835m. We would much prefer see growth.

Caveat Emptor

Importantly, Westrock Coffee had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$23m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$258m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Westrock Coffee you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.