The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says, “The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.” It is only natural to consider a company’s balance sheet when examining how risky it is, as debt is often at play when a company collapses. We can see that Fox Wizel Ltd. (TLV:FOX) does indeed use debt in its business. But should shareholders be concerned about its use of debt?

When is debt a problem?

Generally, debt only becomes a real problem when a company can’t easily pay it back, either by raising capital or through its own cash flow. If things go really badly, lenders can take control of the company. However, a more common (but still painful) scenario is that the company has to raise new equity at a low price, permanently diluting shareholders’ interest. However, the most common situation is when a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first look at both cash and debt levels together.

Check out our latest analysis for Fox-Wizel

How much debt does Fox-Wizel have?

You can click on the chart below to see the historical numbers, but it shows that as of March 2024, Fox-Wizel had ₪1.25 billion in debt, an increase of ₪988.6 million over one year. However, this is offset by ₪1.89 billion in cash, resulting in net cash of ₪636.8 million.

How strong is Fox-Wizel’s balance sheet?

The most recent balance sheet shows that Fox-Wizel had liabilities of ₪2.11 billion due within a year and liabilities of ₪3.56 billion due beyond that, offsetting ₪1.89 billion in cash and ₪680.5 million in receivables due within 12 months. So the company’s liabilities total ₪3.10 billion more than its cash and short-term receivables combined.

This is a huge debt-to-equity ratio relative to its market capitalization of Rs 353 crore. This suggests that shareholders would be heavily diluted if the company had to repair its balance sheet quickly. Despite its sizeable liabilities, Fox-Wizel has net cash flow, so it’s fair to say that the company does not have a heavy debt burden!

Unfortunately, Fox-Wizel’s EBIT actually fell by 2.1% over the last year. If the decline in earnings continues, managing that debt will be as difficult as delivering hot soup on a unicycle. The balance sheet is clearly the area to focus on when analyzing debt. But it’s Fox-Wizel’s earnings that will influence how the balance sheet performs in the future, so if you want to learn more about earnings, it might be worth checking out this graph of long-term earnings performance.

After all, a company needs free cash flow to pay off debt; retained earnings just aren’t enough to do that. While Fox-Wizel 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) into free cash flow to understand how quickly it builds (or burns through) that cash balance. Fortunately for all shareholders, Fox-Wizel actually generated more free cash flow than EBIT over the past three years. There’s nothing like cash when it comes to staying in the good graces of lenders.

Summary

While Fox-Wizel has more liabilities than cash, it also has net cash flow of ₪636.8m. The cherry on top was that 130% of that EBIT was converted into free cash flow, generating ₪875m. So we have no problem with Fox-Wizel’s use of debt. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately, any company can contain risks that exist off the balance sheet. For example, Fox-Wizel has 1 warning sign In our opinion, you should be aware of this.

Of course, if you’re one of those investors who prefers to buy stocks without the burden of debt, you should discover our exclusive list of net cash growth stocks today.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.