Here's Why Mehadrin (TLV:MEDN) Can Afford Some 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.' 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. As with many other companies Mehadrin Ltd. (TLV:MEDN) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Mehadrin

What Is Mehadrin's Debt?

The chart below, which you can click on for greater detail, shows that Mehadrin had ₪347.4m in debt in December 2022; about the same as the year before. However, it does have ₪112.4m in cash offsetting this, leading to net debt of about ₪235.0m.

How Healthy Is Mehadrin's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mehadrin had liabilities of ₪530.4m due within 12 months and liabilities of ₪171.2m due beyond that. Offsetting this, it had ₪112.4m in cash and ₪332.0m in receivables that were due within 12 months. So its liabilities total ₪257.1m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₪385.7m, so it does suggest shareholders should keep an eye on Mehadrin's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Mehadrin's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Mehadrin's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Mehadrin had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₪77m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₪39m in negative free cash flow over the last twelve months. So in short it's a really risky stock. For riskier companies like Mehadrin I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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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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.