Is Ginegar Plastic Products (TLV:GNGR) Using Debt In A Risky Way?

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.' 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 can see that Ginegar Plastic Products Ltd. (TLV:GNGR) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Ginegar Plastic Products

What Is Ginegar Plastic Products's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Ginegar Plastic Products had debt of ₪243.8m, up from ₪140.0m in one year. However, because it has a cash reserve of ₪103.7m, its net debt is less, at about ₪140.1m.

A Look At Ginegar Plastic Products' Liabilities

Zooming in on the latest balance sheet data, we can see that Ginegar Plastic Products had liabilities of ₪228.7m due within 12 months and liabilities of ₪222.0m due beyond that. Offsetting these obligations, it had cash of ₪103.7m as well as receivables valued at ₪191.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪155.5m.

The deficiency here weighs heavily on the ₪86.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Ginegar Plastic Products would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Ginegar Plastic Products'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, Ginegar Plastic Products saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Ginegar Plastic Products had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₪6.0m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of ₪22m over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Ginegar Plastic Products (of which 3 make us uncomfortable!) you should know about.

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.