Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Danel (Adir Yeoshua) Ltd (TLV:DANE) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Danel (Adir Yeoshua) Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2021 Danel (Adir Yeoshua) had ₪52.7m of debt, an increase on ₪32.8m, over one year. However, it does have ₪57.1m in cash offsetting this, leading to net cash of ₪4.37m.
A Look At Danel (Adir Yeoshua)'s Liabilities
Zooming in on the latest balance sheet data, we can see that Danel (Adir Yeoshua) had liabilities of ₪392.5m due within 12 months and liabilities of ₪331.1m due beyond that. On the other hand, it had cash of ₪57.1m and ₪341.4m worth of receivables due within a year. So it has liabilities totalling ₪325.2m more than its cash and near-term receivables, combined.
Of course, Danel (Adir Yeoshua) has a market capitalization of ₪3.91b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Danel (Adir Yeoshua) boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Danel (Adir Yeoshua) grew its EBIT by 45% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Danel (Adir Yeoshua) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Danel (Adir Yeoshua) actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
We could understand if investors are concerned about Danel (Adir Yeoshua)'s liabilities, but we can be reassured by the fact it has has net cash of ₪4.37m. The cherry on top was that in converted 104% of that EBIT to free cash flow, bringing in ₪140m. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Danel (Adir Yeoshua) has 1 warning sign we think 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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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.