Ilex Medical (TLV:ILX) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Ilex Medical Ltd (TLV:ILX) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ilex Medical

What Is Ilex Medical's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Ilex Medical had ₪6.09m of debt in September 2021, down from ₪26.8m, one year before. However, it does have ₪192.8m in cash offsetting this, leading to net cash of ₪186.7m.

A Look At Ilex Medical's Liabilities

We can see from the most recent balance sheet that Ilex Medical had liabilities of ₪267.7m falling due within a year, and liabilities of ₪59.7m due beyond that. Offsetting this, it had ₪192.8m in cash and ₪300.0m in receivables that were due within 12 months. So it can boast ₪165.4m more liquid assets than total liabilities.

This surplus suggests that Ilex Medical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Ilex Medical has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Ilex Medical has boosted its EBIT by 65%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Ilex Medical'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 company can only pay off debt with cold hard cash, not accounting profits. Ilex Medical 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. During the last three years, Ilex Medical produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Ilex Medical has net cash of ₪186.7m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 65% over the last year. So is Ilex Medical's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Ilex Medical has 1 warning sign we think you should be aware of.

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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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.