Is M.Yochananof and Sons (1988) (TLV:YHNF) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that M.Yochananof and Sons (1988) Ltd (TLV:YHNF) does use debt in its business. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does M.Yochananof and Sons (1988) Carry?

The image below, which you can click on for greater detail, shows that M.Yochananof and Sons (1988) had debt of ₪318.6m at the end of December 2024, a reduction from ₪356.2m over a year. But it also has ₪346.2m in cash to offset that, meaning it has ₪27.6m net cash.

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

According to the last reported balance sheet, M.Yochananof and Sons (1988) had liabilities of ₪940.8m due within 12 months, and liabilities of ₪1.74b due beyond 12 months. Offsetting this, it had ₪346.2m in cash and ₪428.5m in receivables that were due within 12 months. So its liabilities total ₪1.91b more than the combination of its cash and short-term receivables.

M.Yochananof and Sons (1988) has a market capitalization of ₪3.84b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. 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.

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

It is well worth noting that M.Yochananof and Sons (1988)'s EBIT shot up like bamboo after rain, gaining 36% in the last twelve months. That'll make it easier to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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. In the last three years, M.Yochananof and Sons (1988) created free cash flow amounting to 17% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While M.Yochananof and Sons (1988) does have more liabilities than liquid assets, it also has net cash of ₪27.6m. And it impressed us with its EBIT growth of 36% over the last year. So we don't have any problem with M.Yochananof and Sons (1988)'s use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in M.Yochananof and Sons (1988), you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.