Is Lapidoth Capital (TLV:LAPD) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Lapidoth Capital Ltd (TLV:LAPD) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Lapidoth Capital

How Much Debt Does Lapidoth Capital Carry?

You can click the graphic below for the historical numbers, but it shows that Lapidoth Capital had ₪1.92b of debt in March 2023, down from ₪2.54b, one year before. But it also has ₪2.16b in cash to offset that, meaning it has ₪245.6m net cash.

How Healthy Is Lapidoth Capital's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lapidoth Capital had liabilities of ₪3.83b due within 12 months and liabilities of ₪1.11b due beyond that. Offsetting this, it had ₪2.16b in cash and ₪1.68b in receivables that were due within 12 months. So its liabilities total ₪1.10b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Lapidoth Capital is worth ₪4.11b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Lapidoth Capital also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Lapidoth Capital grew its EBIT at 18% 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 it is Lapidoth Capital'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Lapidoth Capital 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, Lapidoth Capital 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 Lapidoth Capital does have more liabilities than liquid assets, it also has net cash of ₪245.6m. And it impressed us with free cash flow of ₪1.0b, being 149% of its EBIT. So we don't think Lapidoth Capital's use of debt is risky. 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. For example - Lapidoth Capital has 1 warning sign we think you should be aware of.

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. 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.