Here's Why Fox-Wizel (TLV:FOX) Can Manage Its Debt Responsibly

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. As with many other companies Fox-Wizel Ltd. (TLV:FOX) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Fox-Wizel

What Is Fox-Wizel's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Fox-Wizel had ₪787.2m of debt, an increase on ₪657.8m, over one year. But it also has ₪953.5m in cash to offset that, meaning it has ₪166.3m net cash.

A Look At Fox-Wizel's Liabilities

According to the last reported balance sheet, Fox-Wizel had liabilities of ₪1.41b due within 12 months, and liabilities of ₪1.74b due beyond 12 months. On the other hand, it had cash of ₪953.5m and ₪378.8m worth of receivables due within a year. So it has liabilities totalling ₪1.82b more than its cash and near-term receivables, combined.

Fox-Wizel has a market capitalization of ₪4.14b, 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!

Shareholders should be aware that Fox-Wizel's EBIT was down 34% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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

Although Fox-Wizel's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₪166.3m. The cherry on top was that in converted 147% of that EBIT to free cash flow, bringing in ₪517m. So we are not troubled with Fox-Wizel's debt use. 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. Case in point: We've spotted 3 warning signs for Fox-Wizel you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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