Here's Why Averbuch Formica Center (TLV:AVER) Can Afford Some Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Averbuch Formica Center Ltd. (TLV:AVER) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Averbuch Formica Center

What Is Averbuch Formica Center's Debt?

As you can see below, Averbuch Formica Center had ₪14.4m of debt at June 2023, down from ₪19.8m a year prior. However, because it has a cash reserve of ₪1.87m, its net debt is less, at about ₪12.5m.

A Look At Averbuch Formica Center's Liabilities

The latest balance sheet data shows that Averbuch Formica Center had liabilities of ₪22.7m due within a year, and liabilities of ₪4.26m falling due after that. Offsetting this, it had ₪1.87m in cash and ₪9.59m in receivables that were due within 12 months. So it has liabilities totalling ₪15.5m more than its cash and near-term receivables, combined.

Of course, Averbuch Formica Center has a market capitalization of ₪219.8m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Averbuch Formica Center'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.

Over 12 months, Averbuch Formica Center made a loss at the EBIT level, and saw its revenue drop to ₪22m, which is a fall of 7.5%. That's not what we would hope to see.

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 ₪4.9m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of ₪3.8m into a profit. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Averbuch Formica Center you should be aware of, and 1 of them is concerning.

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.

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

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.