Amir Marketing and Investments in Agriculture (TLV:AMRK) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Amir Marketing and Investments in Agriculture Ltd (TLV:AMRK) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Amir Marketing and Investments in Agriculture

How Much Debt Does Amir Marketing and Investments in Agriculture Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Amir Marketing and Investments in Agriculture had ₪119.2m of debt, an increase on ₪59.2m, over one year. However, it does have ₪37.1m in cash offsetting this, leading to net debt of about ₪82.1m.

How Healthy Is Amir Marketing and Investments in Agriculture's Balance Sheet?

According to the last reported balance sheet, Amir Marketing and Investments in Agriculture had liabilities of ₪515.5m due within 12 months, and liabilities of ₪41.0m due beyond 12 months. Offsetting this, it had ₪37.1m in cash and ₪551.0m in receivables that were due within 12 months. So it can boast ₪31.7m more liquid assets than total liabilities.

This surplus suggests that Amir Marketing and Investments in Agriculture has a conservative balance sheet, and could probably eliminate its debt without much difficulty.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Amir Marketing and Investments in Agriculture's net debt is only 1.3 times its EBITDA. And its EBIT covers its interest expense a whopping 64.6 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. It is just as well that Amir Marketing and Investments in Agriculture's load is not too heavy, because its EBIT was down 24% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Amir Marketing and Investments in Agriculture will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the most recent three years, Amir Marketing and Investments in Agriculture recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

Based on what we've seen Amir Marketing and Investments in Agriculture is not finding it easy, given its EBIT growth rate, but the other factors we considered give us cause to be optimistic. In particular, we are dazzled with its interest cover. When we consider all the elements mentioned above, it seems to us that Amir Marketing and Investments in Agriculture is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Amir Marketing and Investments in Agriculture you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.