Here's Why Decama Capital (TLV:DCMA) Can Afford Some Debt

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. As with many other companies Decama Capital Ltd (TLV:DCMA) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Decama Capital

What Is Decama Capital's Debt?

As you can see below, at the end of June 2020, Decama Capital had ₪16.0m of debt, up from ₪3.50m a year ago. Click the image for more detail. However, it does have ₪7.38m in cash offsetting this, leading to net debt of about ₪8.61m.

How Strong Is Decama Capital's Balance Sheet?

According to the last reported balance sheet, Decama Capital had liabilities of ₪18.1m due within 12 months, and liabilities of ₪418.0k due beyond 12 months. On the other hand, it had cash of ₪7.38m and ₪42.5m worth of receivables due within a year. So it actually has ₪31.4m more liquid assets than total liabilities.

This surplus liquidity suggests that Decama Capital's 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 just as strong as misogynists are weak. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Decama Capital will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given it has no significant operating revenue at the moment, shareholders will be hoping Decama Capital can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

Not only did Decama Capital's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₪1.8m at the EBIT level. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Decama Capital , and understanding them should be part of your investment process.

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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