Does Fox-Wizel (TLV:FOX) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Fox-Wizel Ltd. (TLV:FOX) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Fox-Wizel

How Much Debt Does Fox-Wizel Carry?

The image below, which you can click on for greater detail, shows that Fox-Wizel had debt of ₪653.7m at the end of December 2021, a reduction from ₪733.0m over a year. However, it does have ₪1.77b in cash offsetting this, leading to net cash of ₪1.12b.

How Healthy Is Fox-Wizel's Balance Sheet?

We can see from the most recent balance sheet that Fox-Wizel had liabilities of ₪1.67b falling due within a year, and liabilities of ₪2.16b due beyond that. On the other hand, it had cash of ₪1.77b and ₪461.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪1.59b.

Fox-Wizel has a market capitalization of ₪6.67b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Fox-Wizel boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Fox-Wizel has boosted its EBIT by 99%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Fox-Wizel 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Fox-Wizel has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Fox-Wizel actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Fox-Wizel does have more liabilities than liquid assets, it also has net cash of ₪1.12b. The cherry on top was that in converted 135% of that EBIT to free cash flow, bringing in ₪650m. So is Fox-Wizel's debt a risk? It doesn't seem so to us. 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. We've identified 2 warning signs with Fox-Wizel , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.