We Think Mivne Real Estate (K.D) (TLV:MVNE) Is Taking Some Risk With Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that Mivne Real Estate (K.D) Ltd (TLV:MVNE) does use debt in its business. But the real question is whether this debt is making the company risky.

We've discovered 3 warning signs about Mivne Real Estate (K.D). View them for free.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Mivne Real Estate (K.D) Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Mivne Real Estate (K.D) had ₪8.49b of debt, an increase on ₪7.83b, over one year. However, it does have ₪798.5m in cash offsetting this, leading to net debt of about ₪7.69b.

A Look At Mivne Real Estate (K.D)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Mivne Real Estate (K.D) had liabilities of ₪1.23b due within 12 months and liabilities of ₪9.47b due beyond that. Offsetting this, it had ₪798.5m in cash and ₪362.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪9.54b.

When you consider that this deficiency exceeds the company's ₪7.61b market capitalization, you might well be inclined to review the balance sheet intently. 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.

Check out our latest analysis for Mivne Real Estate (K.D)

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). 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).

Mivne Real Estate (K.D) has a rather high debt to EBITDA ratio of 9.1 which suggests a meaningful debt load. However, its interest coverage of 5.9 is reasonably strong, which is a good sign. We saw Mivne Real Estate (K.D) grow its EBIT by 2.7% in the last twelve months. That's far from incredible but it is a good thing, when it comes to paying off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Mivne Real Estate (K.D) 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 clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Mivne Real Estate (K.D) produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

We'd go so far as to say Mivne Real Estate (K.D)'s net debt to EBITDA was disappointing. But at least its conversion of EBIT to free cash flow is not so bad. Looking at the bigger picture, it seems clear to us that Mivne Real Estate (K.D)'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. However, not all investment risk resides within the balance sheet - far from it. For example Mivne Real Estate (K.D) has 3 warning signs (and 2 which are a bit concerning) we think you should know about.

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.