These 4 Measures Indicate That Israel Shipyards Industries (TLV:ISHI) Is Using Debt Extensively

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 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, Israel Shipyards Industries Ltd (TLV:ISHI) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Israel Shipyards Industries

How Much Debt Does Israel Shipyards Industries Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Israel Shipyards Industries had debt of ₪342.4m, up from ₪312.7m in one year. However, its balance sheet shows it holds ₪404.9m in cash, so it actually has ₪62.5m net cash.

A Look At Israel Shipyards Industries' Liabilities

According to the last reported balance sheet, Israel Shipyards Industries had liabilities of ₪565.0m due within 12 months, and liabilities of ₪239.3m due beyond 12 months. On the other hand, it had cash of ₪404.9m and ₪361.3m worth of receivables due within a year. So its liabilities total ₪38.2m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Israel Shipyards Industries' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₪3.18b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Israel Shipyards Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Israel Shipyards Industries if management cannot prevent a repeat of the 73% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Israel Shipyards Industries 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Israel Shipyards Industries may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last three years, Israel Shipyards Industries actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Israel Shipyards Industries has ₪62.5m in net cash. So while Israel Shipyards Industries does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Israel Shipyards Industries you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.