Is Issta Lines (TLV:ISTA) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Issta Lines Ltd. (TLV:ISTA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Issta Lines

What Is Issta Lines's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Issta Lines had debt of ₪869.3m, up from ₪722.8m in one year. On the flip side, it has ₪79.0m in cash leading to net debt of about ₪790.3m.

How Strong Is Issta Lines' Balance Sheet?

The latest balance sheet data shows that Issta Lines had liabilities of ₪699.5m due within a year, and liabilities of ₪337.8m falling due after that. On the other hand, it had cash of ₪79.0m and ₪149.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪808.6m.

When you consider that this deficiency exceeds the company's ₪736.9m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is Issta Lines's earnings that will influence how the balance sheet holds up in the future. 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 Issta Lines had a loss before interest and tax, and actually shrunk its revenue by 65%, to ₪177m. That makes us nervous, to say the least.

Caveat Emptor

While Issta Lines's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₪28m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. But on the bright side the company actually produced a statutory profit of ₪39m and free cash flow of ₪56m. So one might argue that there's still a chance it can get things on the right track. 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. To that end, you should learn about the 3 warning signs we've spotted with Issta Lines (including 1 which is concerning) .

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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