We Think M.Yochananof and Sons (1988) (TLV:YHNF) Can Stay On Top Of Its Debt

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.' 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. Importantly, M.Yochananof and Sons (1988) Ltd (TLV:YHNF) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

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

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

The image below, which you can click on for greater detail, shows that M.Yochananof and Sons (1988) had debt of ₪60.3m at the end of March 2021, a reduction from ₪86.8m over a year. However, its balance sheet shows it holds ₪211.7m in cash, so it actually has ₪151.5m net cash.

A Look At M.Yochananof and Sons (1988)'s Liabilities

We can see from the most recent balance sheet that M.Yochananof and Sons (1988) had liabilities of ₪689.1m falling due within a year, and liabilities of ₪1.21b due beyond that. Offsetting this, it had ₪211.7m in cash and ₪294.0m in receivables that were due within 12 months. So its liabilities total ₪1.40b more than the combination of its cash and short-term receivables.

M.Yochananof and Sons (1988) has a market capitalization of ₪2.64b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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!

Importantly, M.Yochananof and Sons (1988) grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is M.Yochananof and Sons (1988)'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. 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. Over the most recent three years, M.Yochananof and Sons (1988) recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 ₪151.5m. And it impressed us with its EBIT growth of 47% over the last year. So we are not troubled with M.Yochananof and Sons (1988)'s debt use. 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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