Does Rami Levi Chain Stores Hashikma Marketing 2006 (TLV:RMLI) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Rami Levi Chain Stores Hashikma Marketing 2006 Ltd (TLV:RMLI) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Rami Levi Chain Stores Hashikma Marketing 2006

What Is Rami Levi Chain Stores Hashikma Marketing 2006's Debt?

The image below, which you can click on for greater detail, shows that Rami Levi Chain Stores Hashikma Marketing 2006 had debt of ₪12.8m at the end of June 2023, a reduction from ₪17.2m over a year. However, its balance sheet shows it holds ₪976.7m in cash, so it actually has ₪963.9m net cash.

How Strong Is Rami Levi Chain Stores Hashikma Marketing 2006's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rami Levi Chain Stores Hashikma Marketing 2006 had liabilities of ₪1.70b due within 12 months and liabilities of ₪1.90b due beyond that. On the other hand, it had cash of ₪976.7m and ₪365.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪2.26b.

This deficit is considerable relative to its market capitalization of ₪3.09b, so it does suggest shareholders should keep an eye on Rami Levi Chain Stores Hashikma Marketing 2006's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Rami Levi Chain Stores Hashikma Marketing 2006 also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Rami Levi Chain Stores Hashikma Marketing 2006's EBIT dived 10%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is Rami Levi Chain Stores Hashikma Marketing 2006'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Rami Levi Chain Stores Hashikma Marketing 2006 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. Happily for any shareholders, Rami Levi Chain Stores Hashikma Marketing 2006 actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Rami Levi Chain Stores Hashikma Marketing 2006's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₪963.9m. The cherry on top was that in converted 136% of that EBIT to free cash flow, bringing in ₪396m. So we don't have any problem with Rami Levi Chain Stores Hashikma Marketing 2006'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. Be aware that Rami Levi Chain Stores Hashikma Marketing 2006 is showing 1 warning sign in our investment analysis , you should know about...

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.