Meshulam Levinstein Contracting & Engineering (TLV:LEVI) Has A Somewhat Strained 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.' 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. As with many other companies Meshulam Levinstein Contracting & Engineering Ltd. (TLV:LEVI) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Meshulam Levinstein Contracting & Engineering

How Much Debt Does Meshulam Levinstein Contracting & Engineering Carry?

As you can see below, Meshulam Levinstein Contracting & Engineering had ₪1.03b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₪109.4m in cash, and so its net debt is ₪920.4m.

How Strong Is Meshulam Levinstein Contracting & Engineering's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Meshulam Levinstein Contracting & Engineering had liabilities of ₪715.0m due within 12 months and liabilities of ₪704.3m due beyond that. Offsetting these obligations, it had cash of ₪109.4m as well as receivables valued at ₪187.9m due within 12 months. So it has liabilities totalling ₪1.12b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₪751.2m, 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).

With a net debt to EBITDA ratio of 7.5, it's fair to say Meshulam Levinstein Contracting & Engineering does have a significant amount of debt. But the good news is that it boasts fairly comforting interest cover of 4.6 times, suggesting it can responsibly service its obligations. We note that Meshulam Levinstein Contracting & Engineering grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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's free cash flow amounted to 25% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

On the face of it, Meshulam Levinstein Contracting & Engineering's level of total liabilities left us tentative about the stock, and its net debt to EBITDA was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. Looking at the bigger picture, it seems clear to us that Meshulam Levinstein Contracting & Engineering's use of debt is creating risks for the company. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the debt. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Meshulam Levinstein Contracting & Engineering (of which 1 is potentially serious!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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