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 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. Importantly, Fattal Holdings (1998) Ltd (TLV:FTAL) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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 March 2021 Fattal Holdings (1998) had debt of ₪5.43b, up from ₪5.00b in one year. However, it does have ₪1.11b in cash offsetting this, leading to net debt of about ₪4.32b.

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

The latest balance sheet data shows that Fattal Holdings (1998) had liabilities of ₪2.01b due within a year, and liabilities of ₪18.1b falling due after that. Offsetting these obligations, it had cash of ₪1.11b as well as receivables valued at ₪383.5m due within 12 months. So it has liabilities totalling ₪18.7b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₪4.29b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Fattal Holdings (1998) would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Fattal Holdings (1998) will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Fattal Holdings (1998) had a loss before interest and tax, and actually shrunk its revenue by 76%, to ₪1.3b. 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 ₪879m 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 ₪692m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Fattal Holdings (1998) (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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