Is Lewinsky-Ofer (TLV:LEOF) A Risky Investment?

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.' 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. As with many other companies Lewinsky-Ofer Ltd. (TLV:LEOF) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Lewinsky-Ofer

What Is Lewinsky-Ofer's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Lewinsky-Ofer had ₪162.1m of debt, an increase on ₪92.3m, over one year. However, because it has a cash reserve of ₪64.3m, its net debt is less, at about ₪97.8m.

A Look At Lewinsky-Ofer's Liabilities

Zooming in on the latest balance sheet data, we can see that Lewinsky-Ofer had liabilities of ₪62.1m due within 12 months and liabilities of ₪137.5m due beyond that. On the other hand, it had cash of ₪64.3m and ₪25.0m worth of receivables due within a year. So it has liabilities totalling ₪110.2m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₪181.3m, so it does suggest shareholders should keep an eye on Lewinsky-Ofer's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Lewinsky-Ofer 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.

Over 12 months, Lewinsky-Ofer reported revenue of ₪79m, which is a gain of 37%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Lewinsky-Ofer's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost ₪3.2m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₪24m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Lewinsky-Ofer (1 is concerning) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.