These 4 Measures Indicate That Danel (Adir Yeoshua) (TLV:DANE) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 is this debt a concern to shareholders?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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 September 2022 Danel (Adir Yeoshua) had ₪121.8m of debt, an increase on ₪52.7m, over one year. However, its balance sheet shows it holds ₪131.0m in cash, so it actually has ₪9.23m net cash.

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

According to the last reported balance sheet, Danel (Adir Yeoshua) had liabilities of ₪414.8m due within 12 months, and liabilities of ₪327.6m due beyond 12 months. Offsetting this, it had ₪131.0m in cash and ₪348.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪263.3m.

Since publicly traded Danel (Adir Yeoshua) shares are worth a total of ₪1.38b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Danel (Adir Yeoshua) also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that Danel (Adir Yeoshua) saw its EBIT decline by 8.3% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 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, 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. Over the last three years, Danel (Adir Yeoshua) recorded free cash flow worth a fulsome 97% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Danel (Adir Yeoshua) does have more liabilities than liquid assets, it also has net cash of ₪9.23m. The cherry on top was that in converted 97% of that EBIT to free cash flow, bringing in ₪178m. So we are not troubled with Danel (Adir Yeoshua)'s debt use. 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. For example, we've discovered 2 warning signs for Danel (Adir Yeoshua) that you should be aware of before investing here.

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.