Here's Why Fox-Wizel (TLV:FOX) Has A Meaningful Debt Burden

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Fox-Wizel Ltd. (TLV:FOX) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Fox-Wizel

What Is Fox-Wizel's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Fox-Wizel had debt of ₪1.04b, up from ₪869.2m in one year. However, it does have ₪1.35b in cash offsetting this, leading to net cash of ₪312.3m.

How Healthy Is Fox-Wizel's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fox-Wizel had liabilities of ₪2.12b due within 12 months and liabilities of ₪3.13b due beyond that. On the other hand, it had cash of ₪1.35b and ₪729.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪3.17b.

This is a mountain of leverage relative to its market capitalization of ₪3.65b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Fox-Wizel also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Fox-Wizel's EBIT fell a jaw-dropping 21% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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.

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. During the last three years, Fox-Wizel generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

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 ₪312.3m. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in ₪248m. So while Fox-Wizel does not have a great balance sheet, it's certainly not too bad. 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. Be aware that Fox-Wizel is showing 2 warning signs in our investment analysis , you should know about...

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.