Is Danya Cebus (TLV:DNYA) Using Too Much Debt?

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.' 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 Danya Cebus Ltd. (TLV:DNYA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Danya Cebus

How Much Debt Does Danya Cebus Carry?

The image below, which you can click on for greater detail, shows that Danya Cebus had debt of ₪9.59m at the end of September 2024, a reduction from ₪24.9m over a year. However, it does have ₪427.1m in cash offsetting this, leading to net cash of ₪417.5m.

How Healthy Is Danya Cebus' Balance Sheet?

The latest balance sheet data shows that Danya Cebus had liabilities of ₪1.89b due within a year, and liabilities of ₪88.1m falling due after that. Offsetting this, it had ₪427.1m in cash and ₪1.57b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Danya Cebus' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₪3.80b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Danya Cebus has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Danya Cebus's load is not too heavy, because its EBIT was down 21% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Danya Cebus's earnings that will influence how the balance sheet holds up in the future. 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. 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. In the last three years, Danya Cebus's free cash flow amounted to 36% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Danya Cebus has ₪417.5m in net cash and a decent-looking balance sheet. So we don't have any problem with Danya Cebus's use of debt. 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. Case in point: We've spotted 2 warning signs for Danya Cebus you should be aware of.

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. 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.