Is Fox-Wizel (TLV:FOX) Using Too Much Debt?

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.' 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 can see that Fox-Wizel Ltd. (TLV:FOX) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Our analysis indicates that FOX is potentially undervalued!

What Is Fox-Wizel's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Fox-Wizel had ₪869.2m of debt, an increase on ₪676.6m, over one year. However, its balance sheet shows it holds ₪1.70b in cash, so it actually has ₪832.1m net cash.

How Strong Is Fox-Wizel's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Fox-Wizel had liabilities of ₪1.76b due within 12 months and liabilities of ₪2.57b due beyond that. Offsetting this, it had ₪1.70b in cash and ₪620.2m in receivables that were due within 12 months. So it has liabilities totalling ₪2.01b more than its cash and near-term receivables, combined.

Fox-Wizel has a market capitalization of ₪5.77b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

Also positive, Fox-Wizel grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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

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 ₪832.1m. And it impressed us with free cash flow of ₪548m, being 126% of its EBIT. 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. Case in point: We've spotted 2 warning signs for Fox-Wizel 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.