These 4 Measures Indicate That Bet Shemesh Engines Holdings (1997) (TLV:BSEN) Is Using Debt Extensively

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Bet Shemesh Engines Holdings (1997) Ltd (TLV:BSEN) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Bet Shemesh Engines Holdings (1997)

How Much Debt Does Bet Shemesh Engines Holdings (1997) Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Bet Shemesh Engines Holdings (1997) had US$76.5m of debt, an increase on US$60.3m, over one year. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Bet Shemesh Engines Holdings (1997)'s Balance Sheet?

According to the last reported balance sheet, Bet Shemesh Engines Holdings (1997) had liabilities of US$63.5m due within 12 months, and liabilities of US$64.2m due beyond 12 months. On the other hand, it had cash of US$1.14m and US$25.1m worth of receivables due within a year. So its liabilities total US$101.4m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Bet Shemesh Engines Holdings (1997) has a market capitalization of US$195.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Bet Shemesh Engines Holdings (1997) has a debt to EBITDA ratio of 3.6 and its EBIT covered its interest expense 4.4 times. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. Another concern for investors might be that Bet Shemesh Engines Holdings (1997)'s EBIT fell 11% in the last year. If things keep going like that, handling the debt will about as easy as bundling an angry house cat into its travel box. When analysing debt levels, the balance sheet is the obvious place to start. But it is Bet Shemesh Engines Holdings (1997)'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Bet Shemesh Engines Holdings (1997) saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Mulling over Bet Shemesh Engines Holdings (1997)'s attempt at converting EBIT to free cash flow, we're certainly not enthusiastic. But at least its interest cover is not so bad. We're quite clear that we consider Bet Shemesh Engines Holdings (1997) to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. Case in point: We've spotted 2 warning signs for Bet Shemesh Engines Holdings (1997) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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