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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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 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 December 2022 Fox-Wizel had debt of ₪904.8m, up from ₪653.7m in one year. However, its balance sheet shows it holds ₪1.54b in cash, so it actually has ₪632.8m net cash.

How Healthy Is Fox-Wizel's Balance Sheet?

The latest balance sheet data shows that Fox-Wizel had liabilities of ₪1.97b due within a year, and liabilities of ₪2.74b falling due after that. Offsetting these obligations, it had cash of ₪1.54b as well as receivables valued at ₪536.7m due within 12 months. So it has liabilities totalling ₪2.64b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₪4.05b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 it is Fox-Wizel's earnings that will influence how the balance sheet holds up in the future. 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 ₪632.8m. And it impressed us with free cash flow of ₪379m, being 114% of its EBIT. So we don't have any problem with Fox-Wizel's use of debt. 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 .

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.