Here's Why Alony-Hetz Properties & Investments (TLV:ALHE) Is Weighed Down By Its Debt Load

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. We note that Alony-Hetz Properties & Investments Ltd (TLV:ALHE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Alony-Hetz Properties & Investments

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

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Alony-Hetz Properties & Investments had ₪18.5b of debt, an increase on ₪16.3b, over one year. However, because it has a cash reserve of ₪829.1m, its net debt is less, at about ₪17.7b.

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

The latest balance sheet data shows that Alony-Hetz Properties & Investments had liabilities of ₪2.95b due within a year, and liabilities of ₪20.0b falling due after that. Offsetting this, it had ₪829.1m in cash and ₪477.7m in receivables that were due within 12 months. So it has liabilities totalling ₪21.6b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₪5.54b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Alony-Hetz Properties & Investments would likely require a major re-capitalisation if it had to pay its creditors today.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 0.88 times and a disturbingly high net debt to EBITDA ratio of 46.2 hit our confidence in Alony-Hetz Properties & Investments like a one-two punch to the gut. The debt burden here is substantial. Worse, Alony-Hetz Properties & Investments's EBIT was down 75% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Alony-Hetz Properties & Investments saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

On the face of it, Alony-Hetz Properties & Investments's EBIT growth rate 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. And furthermore, its interest cover also fails to instill confidence. It looks to us like Alony-Hetz Properties & Investments carries a significant balance sheet burden. If you play with fire you risk getting burnt, so we'd probably give this stock a wide berth. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Alony-Hetz Properties & Investments (of which 2 can't be ignored!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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

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.