Y.H. Dimri Construction & Development (TLV:DIMRI) Has A Somewhat Strained Balance Sheet

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.' 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. Importantly, Y.H. Dimri Construction & Development Ltd (TLV:DIMRI) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Y.H. Dimri Construction & Development

How Much Debt Does Y.H. Dimri Construction & Development Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Y.H. Dimri Construction & Development had debt of ₪3.42b, up from ₪2.76b in one year. However, it also had ₪172.0m in cash, and so its net debt is ₪3.25b.

How Strong Is Y.H. Dimri Construction & Development's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Y.H. Dimri Construction & Development had liabilities of ₪1.41b due within 12 months and liabilities of ₪2.85b due beyond that. Offsetting this, it had ₪172.0m in cash and ₪499.8m in receivables that were due within 12 months. So it has liabilities totalling ₪3.59b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₪5.37b, so it does suggest shareholders should keep an eye on Y.H. Dimri Construction & Development's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With a net debt to EBITDA ratio of 7.9, it's fair to say Y.H. Dimri Construction & Development does have a significant amount of debt. However, its interest coverage of 4.0 is reasonably strong, which is a good sign. Notably, Y.H. Dimri Construction & Development's EBIT was pretty flat over the last year, which isn't ideal given the debt load. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Y.H. Dimri Construction & Development 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, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Y.H. Dimri Construction & Development burned a lot of cash. 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, Y.H. Dimri Construction & Development's net debt to EBITDA left us tentative about the stock, and its conversion of EBIT to free cash flow was no more enticing than the one empty restaurant on the busiest night of the year. Having said that, its ability to grow its EBIT isn't such a worry. We're quite clear that we consider Y.H. Dimri Construction & Development to be really rather risky, as a result of its balance sheet health. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. 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. For instance, we've identified 1 warning sign for Y.H. Dimri Construction & Development that you should be aware of.

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.