Global Knafaim Leasing (TLV:GKL) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, '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 Global Knafaim Leasing Ltd (TLV:GKL) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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.

Check out our latest analysis for Global Knafaim Leasing

What Is Global Knafaim Leasing's Net Debt?

As you can see below, Global Knafaim Leasing had US$122.7m of debt at September 2020, down from US$157.9m a year prior. However, it also had US$29.9m in cash, and so its net debt is US$92.8m.

How Healthy Is Global Knafaim Leasing's Balance Sheet?

We can see from the most recent balance sheet that Global Knafaim Leasing had liabilities of US$20.2m falling due within a year, and liabilities of US$115.5m due beyond that. Offsetting these obligations, it had cash of US$29.9m as well as receivables valued at US$331.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$105.5m.

This deficit casts a shadow over the US$35.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Global Knafaim Leasing would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Global Knafaim Leasing'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.

Over 12 months, Global Knafaim Leasing made a loss at the EBIT level, and saw its revenue drop to US$24m, which is a fall of 19%. That's not what we would hope to see.

Caveat Emptor

While Global Knafaim Leasing's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$4.2m. 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. But we think that is unlikely since it is low on liquid assets, and made a loss of US$19m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Global Knafaim Leasing (2 make us uncomfortable) 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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This article by Simply Wall St is general in nature. 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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