Is Fattal Holdings (1998) (TLV:FTAL) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Fattal Holdings (1998) Ltd (TLV:FTAL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. 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.

See our latest analysis for Fattal Holdings (1998)

What Is Fattal Holdings (1998)'s Debt?

As you can see below, at the end of June 2021, Fattal Holdings (1998) had ₪5.53b of debt, up from ₪4.72b a year ago. Click the image for more detail. However, it does have ₪1.43b in cash offsetting this, leading to net debt of about ₪4.10b.

A Look At Fattal Holdings (1998)'s Liabilities

The latest balance sheet data shows that Fattal Holdings (1998) had liabilities of ₪2.27b due within a year, and liabilities of ₪18.0b falling due after that. On the other hand, it had cash of ₪1.43b and ₪494.2m worth of receivables due within a year. So it has liabilities totalling ₪18.4b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₪5.09b 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 ₪1.8b, which is a fall of 53%. 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 ₪236m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized ₪271m 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. 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. For example, we've discovered 2 warning signs for Fattal Holdings (1998) (1 shouldn't be ignored!) that you should be aware of before investing here.

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.

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.

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