Is Lachish Industries (TLV:LHIS) A Risky Investment?

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. Importantly, Lachish Industries Ltd (TLV:LHIS) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Lachish Industries

How Much Debt Does Lachish Industries Carry?

The image below, which you can click on for greater detail, shows that at June 2022 Lachish Industries had debt of ₪8.42m, up from ₪163.0k in one year. However, it does have ₪14.6m in cash offsetting this, leading to net cash of ₪6.18m.

How Healthy Is Lachish Industries' Balance Sheet?

The latest balance sheet data shows that Lachish Industries had liabilities of ₪50.9m due within a year, and liabilities of ₪7.96m falling due after that. On the other hand, it had cash of ₪14.6m and ₪26.3m worth of receivables due within a year. So it has liabilities totalling ₪18.0m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Lachish Industries is worth ₪82.5m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Lachish Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Lachish Industries's EBIT fell a jaw-dropping 22% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. When analysing debt levels, the balance sheet is the obvious place to start. But it is Lachish Industries's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Lachish 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. Happily for any shareholders, Lachish Industries actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Lachish Industries's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₪6.18m. The cherry on top was that in converted 130% of that EBIT to free cash flow, bringing in ₪1.3m. So we are not troubled with Lachish Industries's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Lachish Industries that you should be aware of before investing here.

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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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.