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. We note that Salomon A. Angel Ltd. (TLV:ANGL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Salomon A. Angel
What Is Salomon A. Angel's Debt?
The image below, which you can click on for greater detail, shows that Salomon A. Angel had debt of ₪60.3m at the end of December 2020, a reduction from ₪70.3m over a year. On the flip side, it has ₪3.85m in cash leading to net debt of about ₪56.4m.
A Look At Salomon A. Angel's Liabilities
Zooming in on the latest balance sheet data, we can see that Salomon A. Angel had liabilities of ₪129.2m due within 12 months and liabilities of ₪78.6m due beyond that. Offsetting these obligations, it had cash of ₪3.85m as well as receivables valued at ₪89.3m due within 12 months. So it has liabilities totalling ₪114.7m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Salomon A. Angel is worth ₪248.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off 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 Salomon A. Angel will need earnings to service that debt. 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.
Over 12 months, Salomon A. Angel made a loss at the EBIT level, and saw its revenue drop to ₪415m, which is a fall of 11%. That's not what we would hope to see.
Caveat Emptor
Not only did Salomon A. Angel's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₪1.8m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of ₪4.3m. So we do think this stock is quite risky. 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 instance, we've identified 2 warning signs for Salomon A. Angel (1 can't be ignored) 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. 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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About TASE:ANGL
Adequate balance sheet and slightly overvalued.
