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. We note that Lewinsky-Ofer Ltd. (TLV:LEOF) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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.

See our latest analysis for Lewinsky-Ofer

What Is Lewinsky-Ofer's Debt?

The chart below, which you can click on for greater detail, shows that Lewinsky-Ofer had ₪166.4m in debt in September 2022; about the same as the year before. On the flip side, it has ₪34.6m in cash leading to net debt of about ₪131.8m.

How Healthy Is Lewinsky-Ofer's Balance Sheet?

According to the last reported balance sheet, Lewinsky-Ofer had liabilities of ₪51.5m due within 12 months, and liabilities of ₪125.1m due beyond 12 months. On the other hand, it had cash of ₪34.6m and ₪26.2m worth of receivables due within a year. So it has liabilities totalling ₪115.8m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₪150.5m, 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 it is Lewinsky-Ofer'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.

In the last year Lewinsky-Ofer wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to ₪73m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Lewinsky-Ofer produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₪5.4m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₪57m of cash over the last year. So suffice it to say we consider the stock very risky. 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 3 warning signs for Lewinsky-Ofer you should be aware of, and 2 of them are a bit concerning.

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.