These 4 Measures Indicate That Hagag Group Real Estate Entrepreneurship (TLV:HGG) Is Using Debt Extensively

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 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.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hagag Group Real Estate Entrepreneurship

How Much Debt Does Hagag Group Real Estate Entrepreneurship Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hagag Group Real Estate Entrepreneurship had ₪2.07b of debt, an increase on ₪1.91b, over one year. However, it does have ₪85.5m in cash offsetting this, leading to net debt of about ₪1.99b.

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

According to the last reported balance sheet, Hagag Group Real Estate Entrepreneurship had liabilities of ₪1.91b due within 12 months, and liabilities of ₪599.4m due beyond 12 months. Offsetting this, it had ₪85.5m in cash and ₪600.0m in receivables that were due within 12 months. So its liabilities total ₪1.82b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of ₪1.43b, we think shareholders really should watch Hagag Group Real Estate Entrepreneurship's debt levels, like a parent watching their child ride a bike for the first time. 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.

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.

With a net debt to EBITDA ratio of 8.8, it's fair to say Hagag Group Real Estate Entrepreneurship does have a significant amount of debt. However, its interest coverage of 5.1 is reasonably strong, which is a good sign. Pleasingly, Hagag Group Real Estate Entrepreneurship is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 205% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hagag Group Real Estate Entrepreneurship 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 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 that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Hagag Group Real Estate Entrepreneurship'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. But at least it's pretty decent at growing its EBIT; that's encouraging. Looking at the bigger picture, it seems clear to us that Hagag Group Real Estate Entrepreneurship's use of debt is creating risks for the company. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Hagag Group Real Estate Entrepreneurship (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.