Ari Real Estate (Arena) Investment (TLV:ARIN) Has A Somewhat Strained Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Ari Real Estate (Arena) Investment Ltd (TLV:ARIN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Ari Real Estate (Arena) Investment

How Much Debt Does Ari Real Estate (Arena) Investment Carry?

The chart below, which you can click on for greater detail, shows that Ari Real Estate (Arena) Investment had ₪791.3m in debt in September 2023; about the same as the year before. However, because it has a cash reserve of ₪49.6m, its net debt is less, at about ₪741.7m.

A Look At Ari Real Estate (Arena) Investment's Liabilities

Zooming in on the latest balance sheet data, we can see that Ari Real Estate (Arena) Investment had liabilities of ₪129.0m due within 12 months and liabilities of ₪860.0m due beyond that. On the other hand, it had cash of ₪49.6m and ₪50.0m worth of receivables due within a year. So it has liabilities totalling ₪889.4m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₪829.6m, we think shareholders really should watch Ari Real Estate (Arena) Investment's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

While Ari Real Estate (Arena) Investment's debt to EBITDA ratio of 5.2 suggests a heavy debt load, its interest coverage of 7.6 implies it services that debt with ease. Our best guess is that the company does indeed have significant debt obligations. One way Ari Real Estate (Arena) Investment could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 17%, as it did over the last year. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Ari Real Estate (Arena) Investment will need earnings to service that debt. 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 it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Ari Real Estate (Arena) Investment's free cash flow amounted to 30% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

On the face of it, Ari Real Estate (Arena) Investment's level of total liabilities left us tentative about the stock, and its net debt to EBITDA was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Ari Real Estate (Arena) Investment stock a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. 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 Ari Real Estate (Arena) Investment is showing 4 warning signs in our investment analysis , and 1 of those is significant...

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.