Would Lewinsky-Ofer (TLV:LEOF) Be Better Off With Less 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Lewinsky-Ofer Ltd. (TLV:LEOF) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Net Debt?

As you can see below, at the end of June 2022, Lewinsky-Ofer had ₪184.4m of debt, up from ₪92.2m a year ago. Click the image for more detail. On the flip side, it has ₪55.7m in cash leading to net debt of about ₪128.7m.

How Strong Is Lewinsky-Ofer's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lewinsky-Ofer had liabilities of ₪62.6m due within 12 months and liabilities of ₪139.3m due beyond that. On the other hand, it had cash of ₪55.7m and ₪28.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪117.9m.

This deficit is considerable relative to its market capitalization of ₪167.6m, 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 118%, to ₪94m. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Even though Lewinsky-Ofer managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at ₪3.6m. 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 ₪47m 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. Be aware that Lewinsky-Ofer is showing 4 warning signs in our investment analysis , and 2 of those are a bit unpleasant...

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.