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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Rami Levi Chain Stores Hashikma Marketing 2006 Ltd (TLV:RMLI) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

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

As you can see below, at the end of September 2024, Rami Levi Chain Stores Hashikma Marketing 2006 had ₪12.4m of debt, up from ₪11.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₪1.08b in cash, so it actually has ₪1.06b net cash.

A Look At Rami Levi Chain Stores Hashikma Marketing 2006's Liabilities

According to the last reported balance sheet, Rami Levi Chain Stores Hashikma Marketing 2006 had liabilities of ₪1.98b due within 12 months, and liabilities of ₪1.86b due beyond 12 months. Offsetting these obligations, it had cash of ₪1.08b as well as receivables valued at ₪452.4m due within 12 months. So its liabilities total ₪2.31b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₪3.55b, so it does suggest shareholders should keep an eye on Rami Levi Chain Stores Hashikma Marketing 2006's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Rami Levi Chain Stores Hashikma Marketing 2006 boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Rami Levi Chain Stores Hashikma Marketing 2006

Also good is that Rami Levi Chain Stores Hashikma Marketing 2006 grew its EBIT at 17% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Rami Levi Chain Stores Hashikma Marketing 2006 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. 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. Over the last three years, Rami Levi Chain Stores Hashikma Marketing 2006 actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Rami Levi Chain Stores Hashikma Marketing 2006 does have more liabilities than liquid assets, it also has net cash of ₪1.06b. The cherry on top was that in converted 127% of that EBIT to free cash flow, bringing in ₪459m. So we don't have any problem with Rami Levi Chain Stores Hashikma Marketing 2006's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Rami Levi Chain Stores Hashikma Marketing 2006 you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.