Clal Biotechnology Industries (TLV:CBI) Seems To Use Debt Quite Sensibly

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 Clal Biotechnology Industries Ltd. (TLV:CBI) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Clal Biotechnology Industries

What Is Clal Biotechnology Industries's Net Debt?

As you can see below, Clal Biotechnology Industries had ₪36.0m of debt at December 2020, down from ₪53.7m a year prior. However, its balance sheet shows it holds ₪186.5m in cash, so it actually has ₪150.5m net cash.

How Healthy Is Clal Biotechnology Industries' Balance Sheet?

According to the last reported balance sheet, Clal Biotechnology Industries had liabilities of ₪28.3m due within 12 months, and liabilities of ₪72.0m due beyond 12 months. On the other hand, it had cash of ₪186.5m and ₪13.4m worth of receivables due within a year. So it actually has ₪99.6m more liquid assets than total liabilities.

This surplus liquidity suggests that Clal Biotechnology Industries' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Clal Biotechnology Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Clal Biotechnology Industries made a loss at the EBIT level, last year, it was also good to see that it generated ₪111m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Clal Biotechnology Industries'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Clal Biotechnology Industries 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 year, Clal Biotechnology Industries saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Clal Biotechnology Industries has ₪150.5m in net cash and a decent-looking balance sheet. So we are not troubled with Clal Biotechnology Industries's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Clal Biotechnology Industries 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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