Is Edri-El Israel Assets (TLV:EDRL) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Edri-El Israel Assets Ltd. (TLV:EDRL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Edri-El Israel Assets

What Is Edri-El Israel Assets's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Edri-El Israel Assets had ₪43.2m of debt, an increase on ₪37.4m, over one year. And it doesn't have much cash, so its net debt is about the same.

A Look At Edri-El Israel Assets's Liabilities

Zooming in on the latest balance sheet data, we can see that Edri-El Israel Assets had liabilities of ₪20.6m due within 12 months and liabilities of ₪30.4m due beyond that. Offsetting these obligations, it had cash of ₪409.0k as well as receivables valued at ₪3.16m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪47.4m.

The deficiency here weighs heavily on the ₪16.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Edri-El Israel Assets would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Edri-El Israel Assets will need earnings to service that debt. 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.

In the last year Edri-El Israel Assets had a loss before interest and tax, and actually shrunk its revenue by 57%, to ₪3.8m. To be frank that doesn't bode well.

Caveat Emptor

While Edri-El Israel Assets's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₪2.2m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized ₪4.3m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. For instance, we've identified 3 warning signs for Edri-El Israel Assets (2 are significant) you should be aware of.

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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