Is Clal Biotechnology Industries (TLV:CBI) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Clal Biotechnology Industries Ltd. (TLV:CBI) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Clal Biotechnology Industries

What Is Clal Biotechnology Industries's Debt?

As you can see below, Clal Biotechnology Industries had ₪40.8m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₪102.6m in cash, leading to a ₪61.8m net cash position.

How Strong Is Clal Biotechnology Industries's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Clal Biotechnology Industries had liabilities of ₪44.8m due within 12 months and liabilities of ₪76.7m due beyond that. Offsetting this, it had ₪102.6m in cash and ₪13.6m in receivables that were due within 12 months. So it has liabilities totalling ₪5.30m more than its cash and near-term receivables, combined.

Having regard to Clal Biotechnology Industries's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₪341.8m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Clal Biotechnology Industries boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Clal Biotechnology Industries 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.

In the last year Clal Biotechnology Industries had a loss before interest and tax, and actually shrunk its revenue by 27%, to ₪72m. That makes us nervous, to say the least.

So How Risky Is Clal Biotechnology Industries?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Clal Biotechnology Industries had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₪31m of cash and made a loss of ₪41m. With only ₪61.8m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Clal Biotechnology Industries .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you decide to trade Clal Biotechnology Industries, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.