Alony-Hetz Properties & Investments (TLV:ALHE) Use Of Debt Could Be Considered Risky

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Alony-Hetz Properties & Investments Ltd (TLV:ALHE) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Alony-Hetz Properties & Investments

What Is Alony-Hetz Properties & Investments's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Alony-Hetz Properties & Investments had debt of ₪21.8b, up from ₪20.5b in one year. However, because it has a cash reserve of ₪1.04b, its net debt is less, at about ₪20.8b.

How Strong Is Alony-Hetz Properties & Investments' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Alony-Hetz Properties & Investments had liabilities of ₪4.32b due within 12 months and liabilities of ₪23.9b due beyond that. Offsetting these obligations, it had cash of ₪1.04b as well as receivables valued at ₪470.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪26.7b.

This deficit casts a shadow over the ₪7.03b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Alony-Hetz Properties & Investments would probably need a major re-capitalization if its creditors were to demand repayment.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 0.084 times and a disturbingly high net debt to EBITDA ratio of 85.9 hit our confidence in Alony-Hetz Properties & Investments like a one-two punch to the gut. The debt burden here is substantial. One redeeming factor for Alony-Hetz Properties & Investments is that it turned last year's EBIT loss into a gain of ₪54m, over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Alony-Hetz Properties & Investments'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Alony-Hetz Properties & Investments saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Alony-Hetz Properties & Investments's conversion of EBIT to free cash flow left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least its EBIT growth rate is not so bad. We think the chances that Alony-Hetz Properties & Investments has too much debt a very significant. To our minds, that means the stock is rather high risk, and probably one to avoid; but to each their own (investing) style. 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 learn about the 4 warning signs we've spotted with Alony-Hetz Properties & Investments (including 3 which are potentially serious) .

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.