Rami Levi Chain Stores Hashikma Marketing 2006 (TLV:RMLI) Seems To Use Debt Quite Sensibly

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.' 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, Rami Levi Chain Stores Hashikma Marketing 2006 Ltd (TLV:RMLI) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.

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

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

You can click the graphic below for the historical numbers, but it shows that Rami Levi Chain Stores Hashikma Marketing 2006 had ₪9.96m of debt in September 2020, down from ₪33.4m, one year before. However, its balance sheet shows it holds ₪825.2m in cash, so it actually has ₪815.2m net cash.

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

The latest balance sheet data shows that Rami Levi Chain Stores Hashikma Marketing 2006 had liabilities of ₪1.57b due within a year, and liabilities of ₪1.61b falling due after that. Offsetting these obligations, it had cash of ₪825.2m as well as receivables valued at ₪365.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪2.00b.

This is a mountain of leverage relative to its market capitalization of ₪2.85b. 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!

We note that Rami Levi Chain Stores Hashikma Marketing 2006 grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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 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 ₪815.2m. And it impressed us with free cash flow of ₪445m, being 155% of its EBIT. So we are not troubled with Rami Levi Chain Stores Hashikma Marketing 2006's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Rami Levi Chain Stores Hashikma Marketing 2006, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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