Is Rami Levi Chain Stores Hashikma Marketing 2006 (TLV:RMLI) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Rami Levi Chain Stores Hashikma Marketing 2006

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

As you can see below, at the end of September 2021, Rami Levi Chain Stores Hashikma Marketing 2006 had ₪12.7m of debt, up from ₪9.96m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₪977.8m in cash, so it actually has ₪965.1m 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 ₪1.57b due within 12 months and liabilities of ₪1.70b due beyond that. Offsetting this, it had ₪977.8m in cash and ₪314.7m in receivables that were due within 12 months. So its liabilities total ₪1.99b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Rami Levi Chain Stores Hashikma Marketing 2006 has a market capitalization of ₪3.38b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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!

On top of that, Rami Levi Chain Stores Hashikma Marketing 2006 grew its EBIT by 35% 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 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Rami Levi Chain Stores Hashikma Marketing 2006 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. Over the last three years, Rami Levi Chain Stores Hashikma Marketing 2006 actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Rami Levi Chain Stores Hashikma Marketing 2006 does have more liabilities than liquid assets, it also has net cash of ₪965.1m. And it impressed us with free cash flow of ₪459m, being 145% of its EBIT. So is Rami Levi Chain Stores Hashikma Marketing 2006's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Rami Levi Chain Stores Hashikma Marketing 2006 that you should be aware of before investing here.

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.