Is Gav-Yam Lands (TLV:GVYM) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Gav-Yam Lands Corp. Ltd (TLV:GVYM) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. 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.

See our latest analysis for Gav-Yam Lands

What Is Gav-Yam Lands's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Gav-Yam Lands had debt of ₪8.12b, up from ₪7.11b in one year. On the flip side, it has ₪351.8m in cash leading to net debt of about ₪7.77b.

How Healthy Is Gav-Yam Lands' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Gav-Yam Lands had liabilities of ₪2.25b due within 12 months and liabilities of ₪7.98b due beyond that. Offsetting this, it had ₪351.8m in cash and ₪91.6m in receivables that were due within 12 months. So its liabilities total ₪9.79b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₪5.17b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Gav-Yam Lands would probably need a major re-capitalization if its creditors were to demand repayment.

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.

Strangely Gav-Yam Lands has a sky high EBITDA ratio of 12.2, implying high debt, but a strong interest coverage of 10.9. So either it has access to very cheap long term debt or that interest expense is going to grow! One way Gav-Yam Lands could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 19%, as it did over the last year. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Gav-Yam Lands 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 company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Happily for any shareholders, Gav-Yam Lands actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

While Gav-Yam Lands's level of total liabilities has us nervous. To wit both its conversion of EBIT to free cash flow and interest cover were encouraging signs. Looking at all the angles mentioned above, it does seem to us that Gav-Yam Lands is a somewhat risky investment as a result of its debt. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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, we've discovered 5 warning signs for Gav-Yam Lands (1 is a bit concerning!) that you should be aware of before investing here.

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