Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital.” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Delek Group Ltd. (TLV: DLEKG) uses debt. But the real question is whether this debt makes the business risky.

Why Does Debt Bring Risk?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first consider both liquidity and debt levels.

Discover our latest analysis for Groupe Delek

How much debt does the Delek group have?

The image below, which you can click for more details, shows that the Delek Group had a debt of 20.9 billion yen at the end of September 2021, a reduction from the 22.5 billion yen on a year. However, he also had 3.41 billion yen in cash, so his net debt is 17.5 billion yen.

How healthy is Delek Group’s balance sheet?

We can see from the most recent balance sheet that the Delek Group had liabilities of 12.6 billion yen due within one year and liabilities of 19.6 billion yen beyond. On the other hand, he had cash of 3.41 billion yen and 1.49 billion yen in receivables within a year. It therefore has liabilities totaling 27.3 billion yen more than its combined cash and short-term receivables.

This deficit casts a shadow over society ₪ 4.57b, like a colossus towering above mere mortals. We therefore believe that shareholders should monitor it closely. Ultimately, Delek Group would likely need a major recapitalization if its creditors demanded repayment.

We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Delek Group’s debt is 3.3 times its EBITDA and its EBIT covers its interest charges 4.7 times more. This suggests that while debt levels are significant, we would stop calling them problematic. Notably, Delek Group recorded a loss in EBIT level last year, but improved it to reach a positive EBIT of 5.8 billion euros in the last twelve months. When analyzing debt levels, the balance sheet is the obvious place to start. But you can’t look at debt in isolation; since Delek Group will need profits to repay this debt. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. It is therefore worth checking to what extent profit before interest and taxes (EBIT) is supported by free cash flow. Last year, Delek Group’s free cash flow was 36% of its EBIT, less than we expected. This low cash conversion makes debt management more difficult.

Our point of view

Reflecting on Delek Group’s attempt to stay on top of its total liabilities, we are certainly not enthusiastic. That said, his ability to increase his EBIT is not that much of a concern. We are pretty clear that we consider Delek Group to be really quite risky, because of the health of its balance sheet. We are therefore almost as wary of this stock as a hungry kitten falls into its owner’s fish pond: once bitten, twice shy, as they say. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 3 warning signs for Groupe Delek (1 is potentially serious) you should be aware of.

If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.