Is Bonei Hatichon Civil Engineering & Infrastructures (TLV:BOTI) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Bonei Hatichon Civil Engineering & Infrastructures Ltd. (TLV:BOTI) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Bonei Hatichon Civil Engineering & Infrastructures

How Much Debt Does Bonei Hatichon Civil Engineering & Infrastructures Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Bonei Hatichon Civil Engineering & Infrastructures had ₪624.3m of debt, an increase on ₪514.8m, over one year. On the flip side, it has ₪76.3m in cash leading to net debt of about ₪548.0m.

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

Zooming in on the latest balance sheet data, we can see that Bonei Hatichon Civil Engineering & Infrastructures had liabilities of ₪1.05b due within 12 months and liabilities of ₪12.5m due beyond that. Offsetting this, it had ₪76.3m in cash and ₪224.9m in receivables that were due within 12 months. So its liabilities total ₪763.5m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₪757.7m market capitalization, you might well be inclined to review the balance sheet intently. 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.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (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).

Weak interest cover of 0.62 times and a disturbingly high net debt to EBITDA ratio of 29.2 hit our confidence in Bonei Hatichon Civil Engineering & Infrastructures like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. Even worse, Bonei Hatichon Civil Engineering & Infrastructures saw its EBIT tank 60% over the last 12 months. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. 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 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 the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Bonei Hatichon Civil Engineering & Infrastructures 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, 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 furthermore, its net debt to EBITDA also fails to instill confidence. Considering all the factors previously mentioned, we think that Bonei Hatichon Civil Engineering & Infrastructures really is carrying too much debt. 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 be aware of the 1 warning sign we've spotted with Bonei Hatichon Civil Engineering & Infrastructures .

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.

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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.