Is Fattal Holdings (1998) (TLV:FTAL) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Fattal Holdings (1998) Ltd (TLV:FTAL) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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.

View our latest analysis for Fattal Holdings (1998)

What Is Fattal Holdings (1998)'s Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Fattal Holdings (1998) had debt of ₪5.21b, up from ₪4.63b in one year. However, it also had ₪1.29b in cash, and so its net debt is ₪3.92b.

How Strong Is Fattal Holdings (1998)'s Balance Sheet?

The latest balance sheet data shows that Fattal Holdings (1998) had liabilities of ₪1.93b due within a year, and liabilities of ₪17.6b falling due after that. On the other hand, it had cash of ₪1.29b and ₪313.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪17.9b.

This deficit casts a shadow over the ₪5.44b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Fattal Holdings (1998) would probably need a major re-capitalization if its creditors were to demand repayment. 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 Fattal Holdings (1998) 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.

Over 12 months, Fattal Holdings (1998) made a loss at the EBIT level, and saw its revenue drop to ₪1.9b, which is a fall of 64%. To be frank that doesn't bode well.

Caveat Emptor

While Fattal Holdings (1998)'s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₪759m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized ₪612m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. When analysing debt levels, the balance sheet is the obvious place to start. 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 2 warning signs for Fattal Holdings (1998) (of which 1 makes us a bit uncomfortable!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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