Health Check: How Prudently Does Holmes Place International (TLV:HLMS) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Holmes Place International Ltd. (TLV:HLMS) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Holmes Place International

What Is Holmes Place International's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Holmes Place International had debt of ₪75.7m, up from ₪65.1m in one year. However, it does have ₪50.4m in cash offsetting this, leading to net debt of about ₪25.3m.

A Look At Holmes Place International's Liabilities

The latest balance sheet data shows that Holmes Place International had liabilities of ₪213.7m due within a year, and liabilities of ₪736.0m falling due after that. On the other hand, it had cash of ₪50.4m and ₪21.0m worth of receivables due within a year. So it has liabilities totalling ₪878.2m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₪325.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Holmes Place International 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 Holmes Place International 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 Holmes Place International had a loss before interest and tax, and actually shrunk its revenue by 53%, to ₪196m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Holmes Place International's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₪70m. 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 lost ₪77m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Holmes Place International (1 is significant) you should be aware of.

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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