We Think Golf & Co Group (TLV:GOLF) Is Taking Some Risk With Its Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Golf & Co Group Ltd (TLV:GOLF) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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

How Much Debt Does Golf & Co Group Carry?

You can click the graphic below for the historical numbers, but it shows that Golf & Co Group had ₪32.2m of debt in June 2022, down from ₪58.1m, one year before. But on the other hand it also has ₪73.3m in cash, leading to a ₪41.2m net cash position.

How Healthy 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 ₪323.2m due within 12 months and liabilities of ₪428.9m due beyond that. Offsetting these obligations, it had cash of ₪73.3m as well as receivables valued at ₪118.3m due within 12 months. So it has liabilities totalling ₪560.5m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₪284.0m 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. 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's EBIT fell a jaw-dropping 77% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Golf & Co Group will need earnings to service that debt. 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, 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. Over the last three years, Golf & Co Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Golf & Co Group does have more liabilities than liquid assets, it also has net cash of ₪41.2m. And it impressed us with free cash flow of ₪83m, being 243% of its EBIT. Despite the cash, we do find Golf & Co Group's level of total liabilities concerning, so we're not particularly comfortable with the stock. 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. For example - Golf & Co Group has 5 warning signs we think you should be aware of.

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. 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.