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

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.' 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. We can see that Hagag Group Real Estate Entrepreneurship Ltd (TLV:HGG) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hagag Group Real Estate Entrepreneurship

What Is Hagag Group Real Estate Entrepreneurship's Net Debt?

As you can see below, at the end of March 2023, Hagag Group Real Estate Entrepreneurship had ₪1.81b of debt, up from ₪1.23b a year ago. Click the image for more detail. However, because it has a cash reserve of ₪168.7m, its net debt is less, at about ₪1.64b.

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

The latest balance sheet data shows that Hagag Group Real Estate Entrepreneurship had liabilities of ₪1.78b due within a year, and liabilities of ₪671.1m falling due after that. Offsetting these obligations, it had cash of ₪168.7m as well as receivables valued at ₪258.8m due within 12 months. So its liabilities total ₪2.03b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₪897.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. 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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Hagag Group Real Estate Entrepreneurship shareholders face the double whammy of a high net debt to EBITDA ratio (25.1), and fairly weak interest coverage, since EBIT is just 2.4 times the interest expense. The debt burden here is substantial. Even worse, Hagag Group Real Estate Entrepreneurship saw its EBIT tank 26% over the last 12 months. 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hagag Group Real Estate Entrepreneurship 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into 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 EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. And furthermore, its net debt to EBITDA also fails to instill confidence. It looks to us like Hagag Group Real Estate Entrepreneurship carries a significant balance sheet burden. If you play with fire you risk getting burnt, so we'd probably give this stock a wide berth. 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 5 warning signs for Hagag Group Real Estate Entrepreneurship (3 make us uncomfortable) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.