Is Golf & Co Group (TLV:GOLF) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Golf & Co Group Ltd (TLV:GOLF) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Golf & Co Group

How Much Debt Does Golf & Co Group Carry?

As you can see below, Golf & Co Group had ₪49.4m of debt at September 2020, down from ₪71.3m a year prior. However, its balance sheet shows it holds ₪110.3m in cash, so it actually has ₪60.8m net cash.

How Strong Is Golf & Co Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Golf & Co Group had liabilities of ₪295.3m due within 12 months and liabilities of ₪526.8m due beyond that. On the other hand, it had cash of ₪110.3m and ₪110.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪601.9m.

The deficiency here weighs heavily on the ₪239.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Golf & Co Group would probably need a major re-capitalization if its creditors were to demand repayment. Golf & Co Group boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Importantly, Golf & Co Group grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. 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 ₪60.8m. The cherry on top was that in converted 211% of that EBIT to free cash flow, bringing in ₪159m. So we are not troubled with Golf & Co Group's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs 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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