Warren Buffett said: “Volatility is far from synonymous with risk”. It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. We can see that Brill Shoe Industries Ltd. (TLV: BRIL) uses debt in its business. But the real question is whether this debt makes the business risky.
When is debt dangerous?
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 painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.
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What is the debt of Brill Shoe Industries?
The image below, which you can click for more details, shows that Brill Shoe Industries had a debt of 89.4 million yen at the end of September 2021, a reduction from 123.2 million yen. over a year. On the other hand, it has € 5.90 million in cash, leading to a net debt of around € 83.5 million.
A look at the responsibilities of Brill Shoe Industries
Zooming in on the latest balance sheet data, we can see that Brill Shoe Industries had a liability of 148.2 million yen owed within 12 months and a liability of 195.0 million yen owed beyond that. On the other hand, it had cash of 5.90 million and 103.5 million in receivables within one year. Its liabilities therefore exceed the sum of its cash and its (short-term) receivables by ₪ 233.8 million.
When you consider that this shortfall exceeds the company’s $ 201.0 million market capitalization, you may well be inclined to take a close look at the balance sheet. Hypothetically, extremely high dilution would be required if the company were forced to repay its debts by raising capital at the current share price.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we look at debt versus earnings with and without amortization expenses.
While Brill Shoe Industries’ low debt-to-EBITDA ratio of 1.1 suggests only a modest use of debt, the fact that EBIT only covered interest expense 5.4 times over the past year makes think. We therefore recommend that you keep a close eye on the impact of financing costs on the business. Notably, Brill Shoe Industries’ EBIT was higher than Elon Musk’s, gaining a whopping 3,943% from last year. When analyzing debt levels, the balance sheet is the obvious place to start. But you can’t look at debt in isolation; since Brill Shoe Industries will need revenue to pay off 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, a business needs free cash flow to pay off debts; accounting profits are not enough. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Fortunately for all shareholders, Brill Shoe Industries has actually generated more free cash flow than EBIT over the past three years. This kind of solid silver generation warms our hearts like a puppy in a bumblebee costume.
Our point of view
Brill Shoe Industries’ conversion of EBIT to free cash flow was a real asset in this analysis, as was its EBIT growth rate. In contrast, our confidence was undermined by his apparent struggle to manage his total liabilities. Given this range of data points, we believe Brill Shoe Industries is well positioned to manage its debt levels. That said, the load is heavy enough that we recommend that any shareholder watch it closely. When analyzing debt levels, the balance sheet is the obvious place to start. However, not all investment risks lie on the balance sheet – far from it. To this end, you need to know the 3 warning signs we spotted with Brill Shoe Industries.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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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.