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

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 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. We note that Global Knafaim Leasing Ltd (TLV:GKL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Global Knafaim Leasing

How Much Debt Does Global Knafaim Leasing Carry?

The image below, which you can click on for greater detail, shows that Global Knafaim Leasing had debt of US$107.1m at the end of December 2020, a reduction from US$124.3m over a year. However, it does have US$40.5m in cash offsetting this, leading to net debt of about US$66.7m.

A Look At Global Knafaim Leasing's Liabilities

We can see from the most recent balance sheet that Global Knafaim Leasing had liabilities of US$37.7m falling due within a year, and liabilities of US$81.9m due beyond that. Offsetting these obligations, it had cash of US$40.5m as well as receivables valued at US$118.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$79.0m.

This deficit casts a shadow over the US$36.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Global Knafaim Leasing would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Global Knafaim Leasing will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Global Knafaim Leasing had a loss before interest and tax, and actually shrunk its revenue by 29%, to US$20m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Global Knafaim Leasing's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$7.2m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of US$17m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Global Knafaim Leasing (of which 1 can't be ignored!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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