Does Shagrir Group Vehicle Services (TLV:SHGR) 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. Importantly, Shagrir Group Vehicle Services Ltd (TLV:SHGR) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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. 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 Shagrir Group Vehicle Services

What Is Shagrir Group Vehicle Services's Debt?

The image below, which you can click on for greater detail, shows that Shagrir Group Vehicle Services had debt of ₪86.1m at the end of June 2024, a reduction from ₪130.1m over a year. On the flip side, it has ₪13.5m in cash leading to net debt of about ₪72.6m.

How Healthy Is Shagrir Group Vehicle Services' Balance Sheet?

According to the last reported balance sheet, Shagrir Group Vehicle Services had liabilities of ₪178.0m due within 12 months, and liabilities of ₪139.2m due beyond 12 months. Offsetting this, it had ₪13.5m in cash and ₪103.4m in receivables that were due within 12 months. So it has liabilities totalling ₪200.3m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₪123.5m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Shagrir Group Vehicle Services would likely require a major re-capitalisation if it had to pay its creditors today.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Shagrir Group Vehicle Services's net debt to EBITDA ratio of about 1.8 suggests only moderate use of debt. And its commanding EBIT of 1k times its interest expense, implies the debt load is as light as a peacock feather. Pleasingly, Shagrir Group Vehicle Services is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 544% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shagrir Group Vehicle Services'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Happily for any shareholders, Shagrir Group Vehicle Services 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.

Our View

Based on what we've seen Shagrir Group Vehicle Services is not finding it easy, given its level of total liabilities, but the other factors we considered give us cause to be optimistic. In particular, we are dazzled with its interest cover. When we consider all the elements mentioned above, it seems to us that Shagrir Group Vehicle Services is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Shagrir Group Vehicle Services (of which 1 is a bit concerning!) 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.