Here's Why Golf & Co Group (TLV:GOLF) Can Manage Its Debt Responsibly

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. Importantly, Golf & Co Group Ltd (TLV:GOLF) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Golf & Co Group

What Is Golf & Co Group's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Golf & Co Group had debt of ₪58.1m, up from ₪52.1m in one year. However, it does have ₪152.7m in cash offsetting this, leading to net cash of ₪94.6m.

A Look At Golf & Co Group's Liabilities

The latest balance sheet data shows that Golf & Co Group had liabilities of ₪321.8m due within a year, and liabilities of ₪463.2m falling due after that. Offsetting these obligations, it had cash of ₪152.7m as well as receivables valued at ₪98.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪533.6m.

Given this deficit is actually higher than the company's market capitalization of ₪429.2m, we think shareholders really should watch Golf & Co Group's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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.

Even more impressive was the fact that Golf & Co Group grew its EBIT by 318% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Golf & Co Group will need earnings to service that debt. 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. Golf & Co Group 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, Golf & Co Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Golf & Co Group does have more liabilities than liquid assets, it also has net cash of ₪94.6m. The cherry on top was that in converted 204% of that EBIT to free cash flow, bringing in ₪148m. So we are not troubled with Golf & Co Group's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Golf & Co Group is showing 2 warning signs in our investment analysis , you should know about...

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.

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.

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