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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Danel (Adir Yeoshua) Ltd (TLV:DANE) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Danel (Adir Yeoshua)

How Much Debt Does Danel (Adir Yeoshua) Carry?

The image below, which you can click on for greater detail, shows that at June 2021 Danel (Adir Yeoshua) had debt of ₪34.5m, up from ₪31.0m in one year. But it also has ₪135.7m in cash to offset that, meaning it has ₪101.2m net cash.

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

According to the last reported balance sheet, Danel (Adir Yeoshua) had liabilities of ₪428.2m due within 12 months, and liabilities of ₪313.1m due beyond 12 months. On the other hand, it had cash of ₪135.7m and ₪353.6m worth of receivables due within a year. So its liabilities total ₪252.0m more than the combination of its cash and short-term receivables.

Of course, Danel (Adir Yeoshua) has a market capitalization of ₪3.66b, 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 71% 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 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, 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) actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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 ₪101.2m. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in ₪234m. 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. To that end, you should be aware of the 1 warning sign we've spotted with Danel (Adir Yeoshua) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.

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