Health Check: How Prudently Does Bram Industries (TLV:BRAM) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Bram Industries Ltd. (TLV:BRAM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Bram Industries

How Much Debt Does Bram Industries Carry?

The image below, which you can click on for greater detail, shows that Bram Industries had debt of ₪28.0m at the end of June 2023, a reduction from ₪35.6m over a year. However, it also had ₪1.43m in cash, and so its net debt is ₪26.5m.

A Look At Bram Industries' Liabilities

Zooming in on the latest balance sheet data, we can see that Bram Industries had liabilities of ₪46.9m due within 12 months and liabilities of ₪25.3m due beyond that. Offsetting these obligations, it had cash of ₪1.43m as well as receivables valued at ₪33.6m due within 12 months. So its liabilities total ₪37.2m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₪30.6m 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Bram Industries'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.

Over 12 months, Bram Industries made a loss at the EBIT level, and saw its revenue drop to ₪114m, which is a fall of 12%. We would much prefer see growth.

Caveat Emptor

While Bram Industries's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₪1.4m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident 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 ₪2.4m and free cash flow of ₪13m. So one might argue that there's still a chance it can get things on the right track. 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. Case in point: We've spotted 4 warning signs for Bram Industries you should be aware of, and 2 of them are potentially serious.

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.