Is Lodzia Rotex Investment (TLV:LODZ) Using Debt Sensibly?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Lodzia Rotex Investment Ltd. (TLV:LODZ) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for Lodzia Rotex Investment

How Much Debt Does Lodzia Rotex Investment Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Lodzia Rotex Investment had ₪36.6m of debt, an increase on ₪29.9m, over one year. But on the other hand it also has ₪39.3m in cash, leading to a ₪2.77m net cash position.

How Healthy Is Lodzia Rotex Investment's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lodzia Rotex Investment had liabilities of ₪14.5m due within 12 months and liabilities of ₪36.4m due beyond that. Offsetting this, it had ₪39.3m in cash and ₪5.45m in receivables that were due within 12 months. So its liabilities total ₪6.05m more than the combination of its cash and short-term receivables.

Given Lodzia Rotex Investment has a market capitalization of ₪98.5m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Lodzia Rotex Investment also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Lodzia Rotex Investment will need earnings to service that debt. 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, Lodzia Rotex Investment reported revenue of ₪5.8m, which is a gain of 34%, 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.

So How Risky Is Lodzia Rotex Investment?

While Lodzia Rotex Investment lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₪597k. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The good news for Lodzia Rotex Investment shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Lodzia Rotex Investment (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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. 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.
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