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

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.' 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. Importantly, Golf & Co Group Ltd (TLV:GOLF) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that GOLF is potentially undervalued!

How Much Debt Does Golf & Co Group Carry?

As you can see below, Golf & Co Group had ₪32.2m of debt at June 2022, down from ₪40.3m a year prior. But on the other hand it also has ₪73.3m in cash, leading to a ₪41.2m net cash position.

A Look At Golf & Co Group's Liabilities

The latest balance sheet data shows that Golf & Co Group had liabilities of ₪323.2m due within a year, and liabilities of ₪428.9m falling due after that. On the other hand, it had cash of ₪73.3m and ₪118.3m worth of receivables due within a year. So it has liabilities totalling ₪560.5m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₪251.2m 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'd watch its balance sheet closely, without a doubt. 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.

Shareholders should be aware that Golf & Co Group's EBIT was down 77% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. 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 ₪41.2m. The cherry on top was that in converted 246% of that EBIT to free cash flow, bringing in ₪83m. Despite its cash we think that Golf & Co Group seems to struggle to handle its total liabilities, so we are wary of the stock. 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. For example - Golf & Co Group has 4 warning signs we think you should be aware of.

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.

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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.