Here's Why Bonei Hatichon Civil Engineering & Infrastructures (TLV:BOTI) Is Weighed Down By Its Debt Load

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Bonei Hatichon Civil Engineering & Infrastructures Ltd. (TLV:BOTI) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Bonei Hatichon Civil Engineering & Infrastructures

What Is Bonei Hatichon Civil Engineering & Infrastructures's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Bonei Hatichon Civil Engineering & Infrastructures had ₪555.0m of debt, an increase on ₪478.5m, over one year. However, it also had ₪152.2m in cash, and so its net debt is ₪402.8m.

How Healthy Is Bonei Hatichon Civil Engineering & Infrastructures' Balance Sheet?

The latest balance sheet data shows that Bonei Hatichon Civil Engineering & Infrastructures had liabilities of ₪889.1m due within a year, and liabilities of ₪15.9m falling due after that. On the other hand, it had cash of ₪152.2m and ₪216.6m worth of receivables due within a year. So its liabilities total ₪536.3m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of ₪502.9m, we think shareholders really should watch Bonei Hatichon Civil Engineering & Infrastructures'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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 0.93 times and a disturbingly high net debt to EBITDA ratio of 18.6 hit our confidence in Bonei Hatichon Civil Engineering & Infrastructures like a one-two punch to the gut. The debt burden here is substantial. Worse, Bonei Hatichon Civil Engineering & Infrastructures's EBIT was down 78% over the last year. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Bonei Hatichon Civil Engineering & Infrastructures 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Bonei Hatichon Civil Engineering & Infrastructures burned a lot of cash. 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, Bonei Hatichon Civil Engineering & Infrastructures's conversion of EBIT to free cash flow left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. And even its net debt to EBITDA fails to inspire much confidence. We think the chances that Bonei Hatichon Civil Engineering & Infrastructures has too much debt a very significant. To us, that makes the stock rather risky, like walking through a dog park with your eyes closed. But some investors may feel differently. 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. For example Bonei Hatichon Civil Engineering & Infrastructures has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

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.

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