These 4 metrics indicate that Brill Shoe Industries (TLV: BRIL) is using debt a lot


Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried “. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Like many other companies Brill Shoe Industries Ltd. (TLV: BRIL) uses debt. But does this debt worry shareholders?

When is debt a problem?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

Check out our latest review for Brill Shoe Industries

What is the net debt of Brill Shoe Industries?

As you can see below, Brill Shoe Industries had a debt of 123.0 million yen in March 2021, up from 150.3 million yen the previous year. On the other hand, it has 9.74 million euros in cash, leading to a net debt of around 113.2 million euros.

TASE: BRIL History of debt to equity July 5, 2021

How healthy is Brill Shoe Industries’ balance sheet?

Zooming in on the latest balance sheet data, we can see that Brill Shoe Industries had a liability of 181.0 million yen due within 12 months and a liability of 189.4 million yen beyond. In compensation for these obligations, he had cash of 9.74 million as well as receivables valued at 104.0 million due maturing within 12 months. Thus, its liabilities exceed the sum of its cash and its receivables (short term) by 256.6 million.

The lack here weighs heavily on the 164.3million yen company itself, as if a child struggles under the weight of a huge backpack full of books, his gym equipment and a trumpet. . We therefore believe that shareholders should watch it closely. After all, Brill Shoe Industries would likely need a major recapitalization if it were to pay its creditors today.

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 consider debt versus earnings with and without amortization charges.

Brill Shoe Industries’ net debt stands at a very reasonable level of 2.4 times its EBITDA, while its EBIT only covered its interest expense 3.0 times last year. While this doesn’t worry us too much, it does suggest that the interest payments are somewhat of a burden. Notably, Brill Shoe Industries’ EBIT was higher than Elon Musk’s, gaining a whopping 976% from last year. The balance sheet is clearly the area you need to focus on when analyzing debt. But you can’t look at debt in isolation; since Brill Shoe Industries will need revenue to pay off 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 pay off debts; accounting profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Brill Shoe 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

We feel some apprehension about the difficulty level of Brill Shoe Industries’ total liabilities, but we also have some bright spots to focus on. For example, its conversion from EBIT to free cash flow and the growth rate of EBIT give us some confidence in its ability to manage its debt. We think Brill Shoe Industries’ debt makes it a bit risky, after looking at the aforementioned data points together. This isn’t necessarily a bad thing, as leverage can increase returns on equity, but it’s something to be aware of. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. Example: we have spotted 3 warning signs for Brill Shoe Industries you must be aware.

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

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