Is M.Yochananof and Sons (1988) (TLV:YHNF) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies M.Yochananof and Sons (1988) Ltd (TLV:YHNF) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 M.Yochananof and Sons (1988)

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

You can click the graphic below for the historical numbers, but it shows that M.Yochananof and Sons (1988) had ₪58.6m of debt in December 2021, down from ₪66.9m, one year before. However, its balance sheet shows it holds ₪465.0m in cash, so it actually has ₪406.4m net cash.

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

We can see from the most recent balance sheet that M.Yochananof and Sons (1988) had liabilities of ₪717.1m falling due within a year, and liabilities of ₪1.28b due beyond that. Offsetting these obligations, it had cash of ₪465.0m as well as receivables valued at ₪327.1m due within 12 months. So its liabilities total ₪1.21b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because M.Yochananof and Sons (1988) is worth ₪2.84b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, M.Yochananof and Sons (1988) boasts net cash, so it's fair to say it does not have a heavy debt load!

We saw M.Yochananof and Sons (1988) grow its EBIT by 6.4% in the last twelve months. That's far from incredible but it is a good thing, when it comes to paying off debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine M.Yochananof and Sons (1988)'s ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While M.Yochananof and Sons (1988) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, M.Yochananof and Sons (1988)'s free cash flow amounted to 43% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While M.Yochananof and Sons (1988) does have more liabilities than liquid assets, it also has net cash of ₪406.4m. On top of that, it increased its EBIT by 6.4% in the last twelve months. So we are not troubled with M.Yochananof and Sons (1988)'s debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for M.Yochananof and Sons (1988) 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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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.