Bet Shemesh Engines Holdings (1997) (TLV:BSEN) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Bet Shemesh Engines Holdings (1997) Ltd (TLV:BSEN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Bet Shemesh Engines Holdings (1997)

What Is Bet Shemesh Engines Holdings (1997)'s Debt?

You can click the graphic below for the historical numbers, but it shows that Bet Shemesh Engines Holdings (1997) had US$31.9m of debt in March 2024, down from US$77.2m, one year before. Net debt is about the same, since the it doesn't have much cash.

A Look At Bet Shemesh Engines Holdings (1997)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Bet Shemesh Engines Holdings (1997) had liabilities of US$86.8m due within 12 months and liabilities of US$44.1m due beyond that. On the other hand, it had cash of US$268.0k and US$43.8m worth of receivables due within a year. So it has liabilities totalling US$86.8m more than its cash and near-term receivables, combined.

Given Bet Shemesh Engines Holdings (1997) has a market capitalization of US$474.3m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Looking at its net debt to EBITDA of 0.78 and interest cover of 4.6 times, it seems to us that Bet Shemesh Engines Holdings (1997) is probably using debt in a pretty reasonable way. So we'd recommend keeping a close eye on the impact financing costs are having on the business. Notably, Bet Shemesh Engines Holdings (1997)'s EBIT launched higher than Elon Musk, gaining a whopping 189% on last year. There's no doubt that we learn most about debt from the balance sheet. But it is Bet Shemesh Engines Holdings (1997)'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Bet Shemesh Engines Holdings (1997) actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

The good news is that Bet Shemesh Engines Holdings (1997)'s demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. But truth be told we feel its interest cover does undermine this impression a bit. Zooming out, Bet Shemesh Engines Holdings (1997) seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Bet Shemesh Engines Holdings (1997) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

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