Here's Why Cofix Group (TLV:CFX) Has A Meaningful Debt Burden

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Cofix Group Ltd (TLV:CFX) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Cofix Group

What Is Cofix Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Cofix Group had ₪9.95m of debt, an increase on ₪3.33m, over one year. But on the other hand it also has ₪17.9m in cash, leading to a ₪7.93m net cash position.

How Healthy Is Cofix Group's Balance Sheet?

According to the last reported balance sheet, Cofix Group had liabilities of ₪94.3m due within 12 months, and liabilities of ₪105.9m due beyond 12 months. On the other hand, it had cash of ₪17.9m and ₪22.6m worth of receivables due within a year. So its liabilities total ₪159.7m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₪161.4m, so it does suggest shareholders should keep an eye on Cofix Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Cofix Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Cofix Group made a loss at the EBIT level, last year, but improved that to positive EBIT of ₪3.1m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Cofix Group'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. Cofix Group 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 year, Cofix Group 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 Cofix Group does have more liabilities than liquid assets, it also has net cash of ₪7.93m. And it impressed us with free cash flow of ₪20m, being 660% of its EBIT. So although we see some areas for improvement, we're not too worried about Cofix Group's balance sheet. 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. To that end, you should be aware of the 2 warning signs we've spotted with Cofix Group .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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