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

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Danel (Adir Yeoshua) Ltd (TLV:DANE) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

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 as of March 2022 Danel (Adir Yeoshua) had ₪125.2m of debt, an increase on ₪28.1m, over one year. However, it also had ₪76.7m in cash, and so its net debt is ₪48.5m.

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

The latest balance sheet data shows that Danel (Adir Yeoshua) had liabilities of ₪471.2m due within a year, and liabilities of ₪322.9m falling due after that. Offsetting this, it had ₪76.7m in cash and ₪376.1m in receivables that were due within 12 months. So its liabilities total ₪341.3m more than the combination of its cash and short-term receivables.

Of course, Danel (Adir Yeoshua) has a market capitalization of ₪2.16b, 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.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Danel (Adir Yeoshua) has a low net debt to EBITDA ratio of only 0.19. And its EBIT covers its interest expense a whopping 59.4 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. The good news is that Danel (Adir Yeoshua) has increased its EBIT by 5.7% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Danel (Adir Yeoshua)'s earnings that will influence how the balance sheet holds up in the future. 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 it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Danel (Adir Yeoshua) generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

Danel (Adir Yeoshua)'s interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Looking at the bigger picture, we think Danel (Adir Yeoshua)'s use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs 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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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.