Stock Analysis

We Think Averbuch Formica Center (TLV:AVER) Has A Fair Chunk Of Debt

TASE:AVER
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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Averbuch Formica Center Ltd. (TLV:AVER) does carry debt. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Averbuch Formica Center

What Is Averbuch Formica Center's Debt?

As you can see below, Averbuch Formica Center had ₪11.0m of debt at December 2023, down from ₪21.5m a year prior. However, because it has a cash reserve of ₪297.0k, its net debt is less, at about ₪10.7m.

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TASE:AVER Debt to Equity History June 24th 2024

How Healthy Is Averbuch Formica Center's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Averbuch Formica Center had liabilities of ₪20.7m due within 12 months and liabilities of ₪2.01m due beyond that. On the other hand, it had cash of ₪297.0k and ₪7.70m worth of receivables due within a year. So its liabilities total ₪14.7m more than the combination of its cash and short-term receivables.

Of course, Averbuch Formica Center has a market capitalization of ₪74.7m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 had a loss before interest and tax, and actually shrunk its revenue by 24%, to ₪18m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Averbuch Formica Center's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₪354k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 ₪2.9m into a profit. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Averbuch Formica Center that you should be aware of before investing here.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Averbuch Formica Center is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.

Valuation is complex, but we're helping make it simple.

Find out whether Averbuch Formica Center is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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