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, Albaad Massuot Yitzhak Ltd (TLV:ALBA) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Albaad Massuot Yitzhak
What Is Albaad Massuot Yitzhak's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Albaad Massuot Yitzhak had ₪409.5m of debt in September 2020, down from ₪559.9m, one year before. On the flip side, it has ₪33.9m in cash leading to net debt of about ₪375.6m.
How Healthy Is Albaad Massuot Yitzhak's Balance Sheet?
According to the last reported balance sheet, Albaad Massuot Yitzhak had liabilities of ₪435.9m due within 12 months, and liabilities of ₪342.2m due beyond 12 months. Offsetting this, it had ₪33.9m in cash and ₪276.6m in receivables that were due within 12 months. So it has liabilities totalling ₪467.6m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Albaad Massuot Yitzhak has a market capitalization of ₪914.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Albaad Massuot Yitzhak's net debt of 2.0 times EBITDA suggests graceful use of debt. And the fact that its trailing twelve months of EBIT was 9.4 times its interest expenses harmonizes with that theme. Notably, Albaad Massuot Yitzhak's EBIT launched higher than Elon Musk, gaining a whopping 124% on last year. 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 Albaad Massuot Yitzhak 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Albaad Massuot Yitzhak produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
Our View
Albaad Massuot Yitzhak's EBIT growth rate suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But truth be told we feel its level of total liabilities does undermine this impression a bit. When we consider the range of factors above, it looks like Albaad Massuot Yitzhak is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Albaad Massuot Yitzhak (1 is a bit concerning) you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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This article by Simply Wall St is general in nature. 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.
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About TASE:ALBA
Good value with acceptable track record.
