Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Above all, Willy-Food Investments Ltd (TLV:WLFD) is in debt. But the real question is whether this debt makes the business risky.
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Our analysis indicates that WLFD is potentially overvalued!
What is the debt of Willy-Food Investments?
You can click on the graph below for historical figures, but it shows that in June 2022 Willy-Food Investments had debt of £50.0 million, an increase of none, year on year. However, he has ₪318.5 million in cash to offset this, resulting in a net cash of ₪268.5 million.
A look at the liabilities of Willy-Food Investments
According to the latest published balance sheet, Willy-Food Investments had liabilities of ₪38.4 million due within 12 months and liabilities of ₪56.7 million due beyond 12 months. In return, he had ₪318.5 million in cash and ₪156.0 million in receivables due within 12 months. So he actually has ₪379.3 million After liquid assets than total liabilities.
This surplus strongly suggests that Willy-Food Investments has a rock-solid balance sheet (and debt is no problem). With that in mind, one could argue that its track record means the company is capable of dealing with some adversity. Simply put, the fact that Willy-Food Investments has more cash than debt is probably a good indication that it can safely manage its debt.
But the bad news is that Willy-Food Investments has seen its EBIT plunge 13% over the past twelve months. If this rate of decline in profits continues, the company could find itself in a delicate situation. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of Willy-Food Investments that will influence the balance sheet in the future. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.
Finally, a company can only repay its debts with cold hard cash, not with book profits. Although Willy-Food Investments has net cash on its balance sheet, it is always worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it builds (or erodes) this cash balance. Over the past three years, Willy-Food Investments has recorded free cash flow of 58% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.
While it’s always a good idea to investigate a company’s debt, in this case Willy-Food Investments has £268.5m of net cash and a decent balance sheet. Is the debt of Willy-Food Investments then a risk? This does not seem to us to be the case. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, Willy-Food Investments has 3 warning signs (and 1 that makes us a little uneasy) we think you should know.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
Valuation is complex, but we help make it simple.
Find out if Willy Food Investments is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.
See the free analysis
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.