These 4 Measures Indicate That InterCure (TLV:INCR) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that InterCure Ltd. (TLV:INCR) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for InterCure

What Is InterCure's Net Debt?

As you can see below, at the end of June 2021, InterCure had ₪49.1m of debt, up from ₪14.8m a year ago. Click the image for more detail. But it also has ₪201.4m in cash to offset that, meaning it has ₪152.3m net cash.

How Healthy Is InterCure's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that InterCure had liabilities of ₪90.7m due within 12 months and liabilities of ₪53.3m due beyond that. Offsetting these obligations, it had cash of ₪201.4m as well as receivables valued at ₪42.0m due within 12 months. So it can boast ₪99.4m more liquid assets than total liabilities.

This short term liquidity is a sign that InterCure could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that InterCure has more cash than debt is arguably a good indication that it can manage its debt safely.

Although InterCure made a loss at the EBIT level, last year, it was also good to see that it generated ₪22m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if InterCure can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. InterCure may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, InterCure produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that InterCure has net cash of ₪152.3m, as well as more liquid assets than liabilities. So is InterCure's debt a risk? It doesn't seem so to us. 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 example, we've discovered 1 warning sign for InterCure that you should be aware of before investing here.

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.
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