Here's Why Hagag Group Real Estate Entrepreneurship (TLV:HGG) Is Weighed Down By Its Debt Load

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. Importantly, Hagag Group Real Estate Entrepreneurship Ltd (TLV:HGG) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Hagag Group Real Estate Entrepreneurship

What Is Hagag Group Real Estate Entrepreneurship's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Hagag Group Real Estate Entrepreneurship had debt of ₪1.73b, up from ₪1.30b in one year. On the flip side, it has ₪341.5m in cash leading to net debt of about ₪1.39b.

How Strong Is Hagag Group Real Estate Entrepreneurship's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hagag Group Real Estate Entrepreneurship had liabilities of ₪1.93b due within 12 months and liabilities of ₪416.9m due beyond that. Offsetting these obligations, it had cash of ₪341.5m as well as receivables valued at ₪236.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪1.77b.

This deficit casts a shadow over the ₪793.8m 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, Hagag Group Real Estate Entrepreneurship would probably need a major re-capitalization if its creditors were to demand repayment.

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).

Hagag Group Real Estate Entrepreneurship shareholders face the double whammy of a high net debt to EBITDA ratio (16.3), and fairly weak interest coverage, since EBIT is just 2.3 times the interest expense. This means we'd consider it to have a heavy debt load. However, one redeeming factor is that Hagag Group Real Estate Entrepreneurship grew its EBIT at 14% over the last 12 months, boosting its ability to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hagag Group Real Estate Entrepreneurship's earnings that will influence how the balance sheet holds up in the future. 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 it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Hagag Group Real Estate Entrepreneurship 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

To be frank both Hagag Group Real Estate Entrepreneurship's conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at growing its EBIT; that's encouraging. Taking into account all the aforementioned factors, it looks like Hagag Group Real Estate Entrepreneurship has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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. Case in point: We've spotted 5 warning signs for Hagag Group Real Estate Entrepreneurship you should be aware of, and 3 of them are potentially serious.

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.