We Think Gix Internet (TLV:GIX) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Gix Internet Ltd (TLV:GIX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Gix Internet

What Is Gix Internet's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Gix Internet had ₪4.92m of debt in June 2021, down from ₪5.93m, one year before. But on the other hand it also has ₪12.3m in cash, leading to a ₪7.35m net cash position.

How Healthy Is Gix Internet's Balance Sheet?

We can see from the most recent balance sheet that Gix Internet had liabilities of ₪27.7m falling due within a year, and liabilities of ₪4.65m due beyond that. Offsetting this, it had ₪12.3m in cash and ₪21.9m in receivables that were due within 12 months. So it can boast ₪1.81m more liquid assets than total liabilities.

This short term liquidity is a sign that Gix Internet could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Gix Internet has more cash than debt is arguably a good indication that it can manage its debt safely.

We also note that Gix Internet improved its EBIT from a last year's loss to a positive ₪1.1m. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Gix Internet 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, Gix Internet actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Gix Internet has net cash of ₪7.35m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₪4.8m, being 454% of its EBIT. So we don't have any problem with Gix Internet's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Gix Internet .

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.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.