We Think Danel (Adir Yeoshua) (TLV:DANE) Can Manage Its Debt With Ease

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. Importantly, Danel (Adir Yeoshua) Ltd (TLV:DANE) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

See 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 ₪32.8m of debt in September 2020, down from ₪34.8m, one year before. But it also has ₪176.8m in cash to offset that, meaning it has ₪144.0m net cash.

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

The latest balance sheet data shows that Danel (Adir Yeoshua) had liabilities of ₪347.8m due within a year, and liabilities of ₪199.1m falling due after that. Offsetting this, it had ₪176.8m in cash and ₪251.1m in receivables that were due within 12 months. So it has liabilities totalling ₪119.0m more than its cash and near-term receivables, combined.

Of course, Danel (Adir Yeoshua) has a market capitalization of ₪2.65b, so these liabilities are probably manageable. 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!

On top of that, Danel (Adir Yeoshua) grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. 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 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. 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) 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.

Summing up

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 ₪144.0m. And it impressed us with free cash flow of ₪243m, being 120% of its EBIT. So we don't think Danel (Adir Yeoshua)'s use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Danel (Adir Yeoshua) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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