Does Gix Internet (TLV:GIX) Have A Healthy Balance Sheet?

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 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. As with many other companies Gix Internet Ltd (TLV:GIX) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Gix Internet

What Is Gix Internet's Debt?

You can click the graphic below for the historical numbers, but it shows that Gix Internet had ₪5.25m of debt in December 2020, down from ₪6.81m, one year before. But on the other hand it also has ₪12.7m in cash, leading to a ₪7.50m net cash position.

How Healthy Is Gix Internet's Balance Sheet?

According to the last reported balance sheet, Gix Internet had liabilities of ₪28.1m due within 12 months, and liabilities of ₪9.21m due beyond 12 months. On the other hand, it had cash of ₪12.7m and ₪23.1m worth of receivables due within a year. So its liabilities total ₪1.48m more than the combination of its cash and short-term receivables.

Since publicly traded Gix Internet shares are worth a total of ₪57.4m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Gix Internet boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Gix Internet's EBIT launched higher than Elon Musk, gaining a whopping 1,132% on last year. There's no doubt that we learn most about debt from the balance sheet. But it is Gix Internet'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Gix Internet 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, Gix Internet actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about Gix Internet's liabilities, but we can be reassured by the fact it has has net cash of ₪7.50m. And it impressed us with free cash flow of ₪5.2m, being 221% of its EBIT. So is Gix Internet's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Gix Internet (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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