Is Danel (Adir Yeoshua) (TLV:DANE) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Danel (Adir Yeoshua) Ltd (TLV:DANE) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Danel (Adir Yeoshua)

What Is Danel (Adir Yeoshua)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that Danel (Adir Yeoshua) had ₪30.4m of debt in December 2020, down from ₪39.3m, one year before. However, its balance sheet shows it holds ₪141.4m in cash, so it actually has ₪111.0m net cash.

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

We can see from the most recent balance sheet that Danel (Adir Yeoshua) had liabilities of ₪389.8m falling due within a year, and liabilities of ₪298.7m due beyond that. On the other hand, it had cash of ₪141.4m and ₪265.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪282.0m.

Given Danel (Adir Yeoshua) has a market capitalization of ₪3.08b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Danel (Adir Yeoshua) 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 Danel (Adir Yeoshua) has boosted its EBIT by 63%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Danel (Adir Yeoshua) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Danel (Adir Yeoshua) 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. Happily for any shareholders, Danel (Adir Yeoshua) actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Danel (Adir Yeoshua) has ₪111.0m in net cash. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in ₪245m. So we don't think Danel (Adir Yeoshua)'s use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Danel (Adir Yeoshua) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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