Warren Buffett said: “Volatility is far from synonymous with risk”. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Above all, Brill Shoe Industries Ltd. (TLV: BRIL) carries a debt. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. 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) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. 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?
As you can see below, Brill Shoe Industries had 88.8 million yen in debt in June 2021, up from 122.4 million yen the year before. However, he also had 9.29 million yen in cash, so his net debt is 79.5 million yen.
How strong is Brill Shoe Industries’ balance sheet?
The latest balance sheet data shows that Brill Shoe Industries had debt of 148.7 million yen due within one year, and debts of 205.5 million yen due thereafter. In compensation for these obligations, he had cash of 9.29 million as well as receivables valued at 114.4 million maturing within 12 months. Its liabilities therefore total ₪ 230.5 million more than the combination of its cash and short-term receivables.
This deficit is substantial compared to its market capitalization of 250.0 million euros, so he suggests shareholders keep an eye on the use of debt by Brill Shoe Industries. If its lenders asked it to consolidate the balance sheet, shareholders would likely face serious dilution.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we consider debt versus earnings with and without amortization charges.
Looking at its net debt on EBITDA of 1.2 and interest coverage of 4.7 times, it seems to us that Brill Shoe 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. Fortunately, Brill Shoe Industries is growing its EBIT faster than former Australian Prime Minister Bob Hawke, gaining 981% in the past twelve months. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is the profits of Brill Shoe Industries that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
But our last consideration is also important, because a company cannot pay its debts with paper profits; he needs hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Brill Shoe Industries has actually generated more free cash flow than EBIT. This kind of cash conversion makes us as excited as the crowd when the pace drops at a Daft Punk concert.
Our point of view
Fortunately, Brill Shoe Industries’ impressive conversion of EBIT to free cash flow means it has the upper hand over its debt. But, on a darker note, we’re a little concerned with its total liability level. Looking at all of the above factors together, it seems to us that Brill Shoe Industries can manage its debt quite comfortably. Of course, while this leverage can improve returns on equity, it comes with more risk, so it’s worth keeping an eye out for. 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. Know that Brill Shoe Industries shows 3 warning signs in our investment analysis , you must know…
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-flow-growing 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 the mentioned stocks.
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