These 4 metrics indicate that Delta Galil Industries (TLV: DELT) is using debt reasonably well
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” 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. We can see that Delta Galil Industries Ltd. (TLV: DELT) uses debt in his business. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest review for Delta Galil Industries
What is the net debt of Delta Galil Industries?
The image below, which you can click for more details, shows Delta Galil Industries owed $ 425.3 million in debt at the end of June 2021, a reduction from $ 568.8 million. US over one year. However, he also had $ 279.9 million in cash, so his net debt is $ 145.4 million.
A look at the responsibilities of Delta Galil Industries
Zooming in on the latest balance sheet data, we can see that Delta Galil Industries had liabilities of US $ 515.4 million due within 12 months and US $ 663.8 million liabilities beyond. In return, he had $ 279.9 million in cash and $ 183.6 million in receivables due within 12 months. Its liabilities therefore total US $ 715.7 million more than the combination of its cash and short-term receivables.
While that might sound like a lot, it’s not so bad since Delta Galil Industries has a market cap of $ 1.33 billion, and therefore could likely strengthen its balance sheet by raising capital if needed. However, it is always worth taking a close look at your ability to repay debts.
We measure a company’s debt load relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
Looking at its net debt over EBITDA of 0.59 and interest coverage of 4.7 times, it seems to us that Delta Galil Industries is probably using the debt in a fairly reasonable way. But the interest payments are certainly enough to make us think about how affordable his debt is. Notably, Delta Galil Industries’ EBIT was higher than Elon Musk’s, gaining a whopping 242% from last year. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Delta Galil Industries will need revenue to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Delta Galil Industries has actually generated more free cash flow than EBIT. There is nothing better than cash flow to stay in the good graces of your lenders.
Our point of view
Delta Galil Industries’ EBIT conversion to free cash flow suggests that it can manage its debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. But frankly, we think his total passive level undermines that feeling a bit. Considering all of this data, it seems to us that Delta Galil Industries is taking a pretty sane approach to debt. This means that they are taking a bit more risk, in the hope of increasing shareholder returns. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. To this end, you should inquire about the 2 warning signs we spotted with Delta Galil Industries (including 1 that should not be overlooked).
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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 shares 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.
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