Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Golf & Co Group Ltd (TLV:GOLF) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Golf & Co Group
What Is Golf & Co Group's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Golf & Co Group had ₪47.8m of debt, an increase on ₪36.7m, over one year. But on the other hand it also has ₪134.9m in cash, leading to a ₪87.0m net cash position.
How Healthy Is Golf & Co Group's Balance Sheet?
The latest balance sheet data shows that Golf & Co Group had liabilities of ₪339.5m due within a year, and liabilities of ₪468.4m falling due after that. On the other hand, it had cash of ₪134.9m and ₪119.0m worth of receivables due within a year. So it has liabilities totalling ₪554.1m more than its cash and near-term receivables, combined.
This deficit casts a shadow over the ₪335.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Golf & Co Group would likely require a major re-capitalisation if it had to pay its creditors today. Given that Golf & Co Group has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.
Importantly, Golf & Co Group grew its EBIT by 37% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Golf & Co Group'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Golf & Co Group 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, Golf & Co Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing up
Although Golf & Co Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₪87.0m. And it impressed us with free cash flow of ₪159m, being 227% of its EBIT. So we don't have any problem with Golf & Co Group's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with Golf & Co Group .
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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This article by Simply Wall St is general in nature. 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.
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About TASE:GOLF
Golf & Co Group
Operates as a retail company in the field of fashion, home styling, and apparel in Israel.
Excellent balance sheet and good value.
