Is Rekah Pharmaceutical Industry (TLV:REKA) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Rekah Pharmaceutical Industry Ltd. (TLV:REKA) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Rekah Pharmaceutical Industry's Debt?

You can click the graphic below for the historical numbers, but it shows that Rekah Pharmaceutical Industry had ₪93.2m of debt in December 2024, down from ₪138.0m, one year before. However, it also had ₪7.07m in cash, and so its net debt is ₪86.1m.

A Look At Rekah Pharmaceutical Industry's Liabilities

The latest balance sheet data shows that Rekah Pharmaceutical Industry had liabilities of ₪158.0m due within a year, and liabilities of ₪127.2m falling due after that. On the other hand, it had cash of ₪7.07m and ₪135.7m worth of receivables due within a year. So its liabilities total ₪142.5m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₪157.6m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Rekah Pharmaceutical Industry'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.

View our latest analysis for Rekah Pharmaceutical Industry

Over 12 months, Rekah Pharmaceutical Industry saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Rekah Pharmaceutical Industry had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₪7.3m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ₪18m and the profit of ₪6.2m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. Be aware that Rekah Pharmaceutical Industry is showing 3 warning signs in our investment analysis , you should know about...

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.