Fox-Wizel (TLV:FOX) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Fox-Wizel Ltd. (TLV:FOX) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Fox-Wizel

How Much Debt Does Fox-Wizel Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Fox-Wizel had ₪1.25b of debt, an increase on ₪988.6m, over one year. However, it does have ₪1.89b in cash offsetting this, leading to net cash of ₪636.8m.

How Strong Is Fox-Wizel's Balance Sheet?

We can see from the most recent balance sheet that Fox-Wizel had liabilities of ₪2.11b falling due within a year, and liabilities of ₪3.56b due beyond that. Offsetting this, it had ₪1.89b in cash and ₪680.5m in receivables that were due within 12 months. So it has liabilities totalling ₪3.10b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₪3.53b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Fox-Wizel boasts net cash, so it's fair to say it does not have a heavy debt load!

Sadly, Fox-Wizel's EBIT actually dropped 2.1% in the last year. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Fox-Wizel'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, Fox-Wizel actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Fox-Wizel does have more liabilities than liquid assets, it also has net cash of ₪636.8m. The cherry on top was that in converted 130% of that EBIT to free cash flow, bringing in ₪875m. So we don't have any problem with Fox-Wizel's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Fox-Wizel has 1 warning sign we think you should be aware of.

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.