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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Fox-Wizel

What Is Fox-Wizel's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Fox-Wizel had ₪1.04b of debt, an increase on ₪890.6m, over one year. But it also has ₪1.29b in cash to offset that, meaning it has ₪246.5m net cash.

A Look At Fox-Wizel's Liabilities

The latest balance sheet data shows that Fox-Wizel had liabilities of ₪2.16b due within a year, and liabilities of ₪3.18b falling due after that. Offsetting this, it had ₪1.29b in cash and ₪737.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪3.32b.

This deficit is considerable relative to its market capitalization of ₪3.93b, so it does suggest shareholders should keep an eye on Fox-Wizel's use of debt. 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.

Shareholders should be aware that Fox-Wizel's EBIT was down 23% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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 ₪246.5m. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in ₪409m. So although we see some areas for improvement, we're not too worried about Fox-Wizel's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Fox-Wizel .

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.