Is Amir Marketing and Investments in Agriculture (TLV:AMRK) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Amir Marketing and Investments in Agriculture Ltd. (TLV:AMRK) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Amir Marketing and Investments in Agriculture

What Is Amir Marketing and Investments in Agriculture's Debt?

You can click the graphic below for the historical numbers, but it shows that Amir Marketing and Investments in Agriculture had ₪150.9m of debt in December 2020, down from ₪202.4m, one year before. On the flip side, it has ₪14.2m in cash leading to net debt of about ₪136.7m.

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

We can see from the most recent balance sheet that Amir Marketing and Investments in Agriculture had liabilities of ₪384.0m falling due within a year, and liabilities of ₪31.3m due beyond that. Offsetting these obligations, it had cash of ₪14.2m as well as receivables valued at ₪431.6m due within 12 months. So it can boast ₪30.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Amir Marketing and Investments in Agriculture could probably pay off its debt with ease, as its balance sheet is far from stretched.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

We'd say that Amir Marketing and Investments in Agriculture's moderate net debt to EBITDA ratio ( being 2.0), indicates prudence when it comes to debt. And its strong interest cover of 228 times, makes us even more comfortable. It is well worth noting that Amir Marketing and Investments in Agriculture's EBIT shot up like bamboo after rain, gaining 44% in the last twelve months. That'll make it easier to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Amir Marketing and Investments in Agriculture's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Happily for any shareholders, Amir Marketing and Investments in Agriculture actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Happily, Amir Marketing and Investments in Agriculture's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! It looks Amir Marketing and Investments in Agriculture has no trouble standing on its own two feet, and it has no reason to fear its lenders. To our minds it has a healthy happy balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Amir Marketing and Investments in Agriculture (of which 1 doesn't sit too well with us!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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