Is Issta Lines (TLV:ISTA) Weighed On By Its Debt Load?

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.' 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. We note that Issta Lines Ltd. (TLV:ISTA) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Issta Lines

What Is Issta Lines's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Issta Lines had ₪1.28b of debt, an increase on ₪795.8m, over one year. However, because it has a cash reserve of ₪88.6m, its net debt is less, at about ₪1.19b.

How Strong Is Issta Lines' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Issta Lines had liabilities of ₪735.6m due within 12 months and liabilities of ₪692.2m due beyond that. On the other hand, it had cash of ₪88.6m and ₪219.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪1.12b.

When you consider that this deficiency exceeds the company's ₪965.2m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 Issta Lines 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.

Over 12 months, Issta Lines made a loss at the EBIT level, and saw its revenue drop to ₪84m, which is a fall of 83%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Issta Lines's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₪49m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. But on the bright side the company actually produced a statutory profit of ₪38m and free cash flow of ₪15m. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Issta Lines (1 is concerning) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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