Does M.Yochananof and Sons (1988) (TLV:YHNF) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that M.Yochananof and Sons (1988) Ltd (TLV:YHNF) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for M.Yochananof and Sons (1988)

What Is M.Yochananof and Sons (1988)'s Net Debt?

As you can see below, M.Yochananof and Sons (1988) had ₪66.9m of debt at December 2020, down from ₪93.4m a year prior. But it also has ₪229.3m in cash to offset that, meaning it has ₪162.4m net cash.

How Healthy Is M.Yochananof and Sons (1988)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that M.Yochananof and Sons (1988) had liabilities of ₪633.4m due within 12 months and liabilities of ₪1.22b due beyond that. Offsetting this, it had ₪229.3m in cash and ₪305.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪1.32b.

While this might seem like a lot, it is not so bad since M.Yochananof and Sons (1988) has a market capitalization of ₪2.44b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, M.Yochananof and Sons (1988) also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is well worth noting that M.Yochananof and Sons (1988)'s EBIT shot up like bamboo after rain, gaining 55% in the last twelve months. That'll make it easier to manage its debt. 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 M.Yochananof and Sons (1988) will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. M.Yochananof and Sons (1988) 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. During the last three years, M.Yochananof and Sons (1988) produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although M.Yochananof and Sons (1988)'s balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₪162.4m. And we liked the look of last year's 55% year-on-year EBIT growth. So we don't have any problem with M.Yochananof and Sons (1988)'s use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of M.Yochananof and Sons (1988)'s earnings per share history for free.

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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