Here's Why Danel (Adir Yeoshua) (TLV:DANE) Can Manage Its Debt Responsibly

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.' 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. Importantly, Danel (Adir Yeoshua) Ltd (TLV:DANE) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Danel (Adir Yeoshua)

How Much Debt Does Danel (Adir Yeoshua) Carry?

You can click the graphic below for the historical numbers, but it shows that Danel (Adir Yeoshua) had ₪116.6m of debt in September 2023, down from ₪121.8m, one year before. On the flip side, it has ₪102.5m in cash leading to net debt of about ₪14.1m.

How Healthy Is Danel (Adir Yeoshua)'s Balance Sheet?

The latest balance sheet data shows that Danel (Adir Yeoshua) had liabilities of ₪459.5m due within a year, and liabilities of ₪306.7m falling due after that. Offsetting these obligations, it had cash of ₪102.5m as well as receivables valued at ₪390.6m due within 12 months. So it has liabilities totalling ₪273.1m more than its cash and near-term receivables, combined.

Given Danel (Adir Yeoshua) has a market capitalization of ₪1.84b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Danel (Adir Yeoshua) has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Danel (Adir Yeoshua)'s debt of just 0.08 times EBITDA is really very modest. And this impression is enhanced by its strong EBIT which covers interest costs 7.8 times. It is just as well that Danel (Adir Yeoshua)'s load is not too heavy, because its EBIT was down 31% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Danel (Adir Yeoshua) will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Danel (Adir Yeoshua) generated free cash flow amounting to a very robust 80% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

The good news is that Danel (Adir Yeoshua)'s demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. But we must concede we find its EBIT growth rate has the opposite effect. Looking at all the aforementioned factors together, it strikes us that Danel (Adir Yeoshua) can handle its debt fairly comfortably. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Danel (Adir Yeoshua) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.