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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Bet Shemesh Engines Holdings (1997) Ltd (TLV:BSEN) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

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

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

The image below, which you can click on for greater detail, shows that at September 2021 Bet Shemesh Engines Holdings (1997) had debt of US$82.6m, up from US$77.4m in one year. And it doesn't have much cash, so its net debt is about the same.

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

Zooming in on the latest balance sheet data, we can see that Bet Shemesh Engines Holdings (1997) had liabilities of US$62.3m due within 12 months and liabilities of US$59.5m due beyond that. Offsetting this, it had US$117.0k in cash and US$22.6m in receivables that were due within 12 months. So it has liabilities totalling US$99.0m more than its cash and near-term receivables, combined.

Bet Shemesh Engines Holdings (1997) has a market capitalization of US$217.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 0.44 times and a disturbingly high net debt to EBITDA ratio of 7.9 hit our confidence in Bet Shemesh Engines Holdings (1997) like a one-two punch to the gut. The debt burden here is substantial. Worse, Bet Shemesh Engines Holdings (1997)'s EBIT was down 91% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 it's worth checking how much of that EBIT is backed by 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

On the face of it, Bet Shemesh Engines Holdings (1997)'s conversion of EBIT to free cash flow left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. But at least its level of total liabilities is not so bad. Taking into account all the aforementioned factors, it looks like Bet Shemesh Engines Holdings (1997) has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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 instance, we've identified 2 warning signs for Bet Shemesh Engines Holdings (1997) that you should be aware of.

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.