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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Meshulam Levinstein Contracting & Engineering Ltd. (TLV:LEVI) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Meshulam Levinstein Contracting & Engineering

What Is Meshulam Levinstein Contracting & Engineering's Net Debt?

As you can see below, at the end of September 2023, Meshulam Levinstein Contracting & Engineering had ₪1.36b of debt, up from ₪956.4m a year ago. Click the image for more detail. However, because it has a cash reserve of ₪314.4m, its net debt is less, at about ₪1.04b.

A Look At Meshulam Levinstein Contracting & Engineering's Liabilities

We can see from the most recent balance sheet that Meshulam Levinstein Contracting & Engineering had liabilities of ₪716.7m falling due within a year, and liabilities of ₪1.33b due beyond that. Offsetting these obligations, it had cash of ₪314.4m as well as receivables valued at ₪73.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪1.66b.

Given this deficit is actually higher than the company's market capitalization of ₪1.20b, we think shareholders really should watch Meshulam Levinstein Contracting & Engineering's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

While Meshulam Levinstein Contracting & Engineering's debt to EBITDA ratio of 6.3 suggests a heavy debt load, its interest coverage of 9.8 implies it services that debt with ease. Overall we'd say it seems likely the company is carrying a fairly heavy swag of debt. Importantly, Meshulam Levinstein Contracting & Engineering's EBIT fell a jaw-dropping 23% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 Meshulam Levinstein Contracting & Engineering 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last three years, Meshulam Levinstein Contracting & Engineering created free cash flow amounting to 16% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

To be frank both Meshulam Levinstein Contracting & Engineering's net debt to EBITDA and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. But on the bright side, its interest cover is a good sign, and makes us more optimistic. Taking into account all the aforementioned factors, it looks like Meshulam Levinstein Contracting & Engineering has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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 2 warning signs for Meshulam Levinstein Contracting & Engineering (1 is a bit unpleasant) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.