Is Fox-Wizel (TLV:FOX) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Fox-Wizel Ltd. (TLV:FOX) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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.

See 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 at March 2022 Fox-Wizel had debt of ₪921.4m, up from ₪725.1m in one year. But on the other hand it also has ₪1.86b in cash, leading to a ₪934.1m net cash position.

How Strong Is Fox-Wizel's Balance Sheet?

We can see from the most recent balance sheet that Fox-Wizel had liabilities of ₪1.89b falling due within a year, and liabilities of ₪2.43b due beyond that. Offsetting this, it had ₪1.86b in cash and ₪621.1m in receivables that were due within 12 months. So its liabilities total ₪1.83b more than the combination of its cash and short-term receivables.

Fox-Wizel has a market capitalization of ₪5.96b, 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!

On top of that, Fox-Wizel grew its EBIT by 41% over the last twelve months, and that growth will make it easier to handle its debt. 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 company can only pay off debt with cold hard cash, not accounting profits. Fox-Wizel may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Fox-Wizel actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Fox-Wizel does have more liabilities than liquid assets, it also has net cash of ₪934.1m. The cherry on top was that in converted 125% of that EBIT to free cash flow, bringing in ₪573m. So is Fox-Wizel's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Fox-Wizel has 3 warning signs we think 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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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.