These 4 Measures Indicate That Rami Levi Chain Stores Hashikma Marketing 2006 (TLV:RMLI) Is Using Debt Reasonably Well

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.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

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

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

As you can see below, at the end of December 2022, Rami Levi Chain Stores Hashikma Marketing 2006 had ₪14.9m of debt, up from ₪14.2m a year ago. Click the image for more detail. But on the other hand it also has ₪911.4m in cash, leading to a ₪896.5m net cash position.

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

According to the last reported balance sheet, Rami Levi Chain Stores Hashikma Marketing 2006 had liabilities of ₪1.61b due within 12 months, and liabilities of ₪1.84b due beyond 12 months. Offsetting this, it had ₪911.4m in cash and ₪318.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪2.22b.

This deficit is considerable relative to its market capitalization of ₪3.03b, 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. 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.

Notably Rami Levi Chain Stores Hashikma Marketing 2006's EBIT was pretty flat over the last year. Ideally it can diminish its debt load by kick-starting earnings growth. There's no doubt that we learn most about debt from the balance sheet. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. 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 ₪896.5m. And it impressed us with free cash flow of ₪397m, being 137% of its EBIT. So we are not troubled with Rami Levi Chain Stores Hashikma Marketing 2006's debt use. 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 1 warning sign for Rami Levi Chain Stores Hashikma Marketing 2006 you should be aware of.

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.