Does Averbuch Formica Center (TLV:AVER) Have A 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. We can see that Averbuch Formica Center Ltd. (TLV:AVER) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Averbuch Formica Center

How Much Debt Does Averbuch Formica Center Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Averbuch Formica Center had ₪21.5m of debt, an increase on ₪19.6m, over one year. However, because it has a cash reserve of ₪1.72m, its net debt is less, at about ₪19.8m.

How Healthy Is Averbuch Formica Center's Balance Sheet?

According to the last reported balance sheet, Averbuch Formica Center had liabilities of ₪28.7m due within 12 months, and liabilities of ₪5.99m due beyond 12 months. Offsetting this, it had ₪1.72m in cash and ₪10.5m in receivables that were due within 12 months. So its liabilities total ₪22.4m more than the combination of its cash and short-term receivables.

Since publicly traded Averbuch Formica Center shares are worth a total of ₪278.2m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Averbuch Formica Center 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.

In the last year Averbuch Formica Center's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Averbuch Formica Center had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₪446k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of ₪15m and a profit of ₪1.8m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Averbuch Formica Center is showing 4 warning signs in our investment analysis , and 1 of those is potentially serious...

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.