Does Danya Cebus (TLV:DNYA) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Danya Cebus Ltd. (TLV:DNYA) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

Check out our latest analysis for Danya Cebus

How Much Debt Does Danya Cebus Carry?

You can click the graphic below for the historical numbers, but it shows that Danya Cebus had ₪15.9m of debt in March 2024, down from ₪21.5m, one year before. However, it does have ₪642.5m in cash offsetting this, leading to net cash of ₪626.6m.

How Healthy Is Danya Cebus' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Danya Cebus had liabilities of ₪1.86b due within 12 months and liabilities of ₪70.6m due beyond that. Offsetting these obligations, it had cash of ₪642.5m as well as receivables valued at ₪1.29b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Danya Cebus' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₪2.49b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Danya Cebus boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Danya Cebus saw its EBIT drop by 7.0% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Danya Cebus 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Danya Cebus 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. During the last three years, Danya Cebus generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Danya Cebus has net cash of ₪626.6m, as well as more liquid assets than liabilities. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in ₪270m. So we don't think Danya Cebus'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. We've identified 1 warning sign with Danya Cebus , and understanding them should be part of your investment process.

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.

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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.