Is Holmes Place International (TLV:HLMS) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Holmes Place International Ltd. (TLV:HLMS) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, 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 Holmes Place International had debt of ₪70.1m at the end of September 2021, a reduction from ₪95.4m over a year. However, it does have ₪20.2m in cash offsetting this, leading to net debt of about ₪49.9m.

How Healthy Is Holmes Place International's Balance Sheet?

We can see from the most recent balance sheet that Holmes Place International had liabilities of ₪172.9m falling due within a year, and liabilities of ₪766.3m due beyond that. Offsetting these obligations, it had cash of ₪20.2m as well as receivables valued at ₪35.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪883.2m.

This deficit casts a shadow over the ₪355.4m company, like a colossus towering over mere mortals. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Holmes Place International had a loss before interest and tax, and actually shrunk its revenue by 30%, to ₪212m. 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). Indeed, it lost a very considerable ₪63m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of ₪66m. And until that time we think this is a risky stock. 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 example - Holmes Place International has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.