Panaxia Labs Israel (TLV:PNAX) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Panaxia Labs Israel Ltd (TLV:PNAX) does use debt in its business. But should shareholders be worried about its use of debt?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Panaxia Labs Israel

How Much Debt Does Panaxia Labs Israel Carry?

As you can see below, at the end of September 2021, Panaxia Labs Israel had ₪7.71m of debt, up from ₪662.0k a year ago. Click the image for more detail. However, it does have ₪1.61m in cash offsetting this, leading to net debt of about ₪6.10m.

How Strong Is Panaxia Labs Israel's Balance Sheet?

We can see from the most recent balance sheet that Panaxia Labs Israel had liabilities of ₪55.9m falling due within a year, and liabilities of ₪8.60m due beyond that. Offsetting this, it had ₪1.61m in cash and ₪45.3m in receivables that were due within 12 months. So it has liabilities totalling ₪17.6m more than its cash and near-term receivables, combined.

Of course, Panaxia Labs Israel has a market capitalization of ₪102.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Panaxia Labs Israel'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.

Over 12 months, Panaxia Labs Israel reported revenue of ₪77m, which is a gain of 52%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Panaxia Labs Israel still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₪19m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₪38m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 example, we've discovered 5 warning signs for Panaxia Labs Israel (2 don't sit too well with us!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.