Is Amir Marketing and Investments in Agriculture (TLV:AMRK) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Amir Marketing and Investments in Agriculture Ltd. (TLV:AMRK) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Amir Marketing and Investments in Agriculture

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

As you can see below, Amir Marketing and Investments in Agriculture had ₪74.5m of debt at September 2020, down from ₪96.0m a year prior. On the flip side, it has ₪37.7m in cash leading to net debt of about ₪36.8m.

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

Zooming in on the latest balance sheet data, we can see that Amir Marketing and Investments in Agriculture had liabilities of ₪404.2m due within 12 months and liabilities of ₪30.7m due beyond that. Offsetting this, it had ₪37.7m in cash and ₪432.1m in receivables that were due within 12 months. So it actually has ₪34.9m 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.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Amir Marketing and Investments in Agriculture has a low net debt to EBITDA ratio of only 0.61. And its EBIT easily covers its interest expense, being 149 times the size. So we're pretty relaxed about its super-conservative use of debt. And we also note warmly that Amir Marketing and Investments in Agriculture grew its EBIT by 15% last year, making its debt load easier to handle. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into 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. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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. For investing nerds like us its balance sheet is almost charming. 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. To that end, you should learn about the 4 warning signs we've spotted with Amir Marketing and Investments in Agriculture (including 1 which is a bit unpleasant) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

If you’re looking to trade Amir Marketing and Investments in Agriculture, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.