Here's Why InterCure (TLV:INCR) Can Manage Its Debt Responsibly

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.' 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, InterCure Ltd. (TLV:INCR) does carry 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. 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, 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 InterCure

What Is InterCure's Net Debt?

As you can see below, at the end of June 2022, InterCure had ₪141.4m of debt, up from ₪49.1m a year ago. Click the image for more detail. But it also has ₪221.5m in cash to offset that, meaning it has ₪80.1m net cash.

How Strong Is InterCure's Balance Sheet?

According to the last reported balance sheet, InterCure had liabilities of ₪222.9m due within 12 months, and liabilities of ₪68.1m due beyond 12 months. On the other hand, it had cash of ₪221.5m and ₪73.0m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to InterCure's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₪810.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, InterCure boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, InterCure grew its EBIT by 146% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine InterCure's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While InterCure has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last two years, InterCure created free cash flow amounting to 12% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case InterCure has ₪80.1m in net cash and a decent-looking balance sheet. And we liked the look of last year's 146% year-on-year EBIT growth. So is InterCure's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - InterCure has 2 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.