Does Meshulam Levinstein Contracting & Engineering (TLV:LEVI) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Meshulam Levinstein Contracting & Engineering Ltd. (TLV:LEVI) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Meshulam Levinstein Contracting & Engineering

What Is Meshulam Levinstein Contracting & Engineering's Debt?

The image below, which you can click on for greater detail, shows that Meshulam Levinstein Contracting & Engineering had debt of ₪973.6m at the end of December 2020, a reduction from ₪1.03b over a year. However, it also had ₪139.5m in cash, and so its net debt is ₪834.2m.

A Look At Meshulam Levinstein Contracting & Engineering's Liabilities

The latest balance sheet data shows that Meshulam Levinstein Contracting & Engineering had liabilities of ₪657.6m due within a year, and liabilities of ₪726.0m falling due after that. Offsetting these obligations, it had cash of ₪139.5m as well as receivables valued at ₪208.0m due within 12 months. So it has liabilities totalling ₪1.04b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₪1.09b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

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.

Meshulam Levinstein Contracting & Engineering has a rather high debt to EBITDA ratio of 6.7 which suggests a meaningful debt load. But the good news is that it boasts fairly comforting interest cover of 4.7 times, suggesting it can responsibly service its obligations. We note that Meshulam Levinstein Contracting & Engineering grew its EBIT by 20% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Meshulam Levinstein Contracting & Engineering'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. In the last three years, Meshulam Levinstein Contracting & Engineering's free cash flow amounted to 48% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Meshulam Levinstein Contracting & Engineering's struggle handle its debt, based on its EBITDA, had us second guessing its balance sheet strength, but the other data-points we considered were relatively redeeming. In particular, its EBIT growth rate was re-invigorating. Taking the abovementioned factors together we do think Meshulam Levinstein Contracting & Engineering's debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Meshulam Levinstein Contracting & Engineering is showing 4 warning signs in our investment analysis , and 1 of those is significant...

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. 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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