Mydas Real Estate Investments (TLV:MYDS) Has No Shortage Of Debt

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 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 Mydas Real Estate Investments Ltd (TLV:MYDS) does use debt in its business. But should shareholders be worried about its use of debt?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Mydas Real Estate Investments

What Is Mydas Real Estate Investments's Debt?

You can click the graphic below for the historical numbers, but it shows that Mydas Real Estate Investments had ₪124.8m of debt in September 2023, down from ₪143.6m, one year before. On the flip side, it has ₪4.99m in cash leading to net debt of about ₪119.8m.

A Look At Mydas Real Estate Investments' Liabilities

Zooming in on the latest balance sheet data, we can see that Mydas Real Estate Investments had liabilities of ₪38.9m due within 12 months and liabilities of ₪91.1m due beyond that. Offsetting these obligations, it had cash of ₪4.99m as well as receivables valued at ₪1.93m due within 12 months. So its liabilities total ₪123.1m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₪46.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Mydas Real Estate Investments would likely require a major re-capitalisation if it had to pay its creditors today.

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).

Weak interest cover of 0.80 times and a disturbingly high net debt to EBITDA ratio of 128 hit our confidence in Mydas Real Estate Investments like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. One redeeming factor for Mydas Real Estate Investments is that it turned last year's EBIT loss into a gain of ₪537k, over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Mydas Real Estate Investments's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Mydas Real Estate Investments 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, Mydas Real Estate Investments's conversion of EBIT to free cash flow left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least its EBIT growth rate is not so bad. We think the chances that Mydas Real Estate Investments has too much debt a very significant. To us, that makes the stock rather risky, like walking through a dog park with your eyes closed. But some investors may feel differently. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Mydas Real Estate Investments has 5 warning signs (and 2 which are potentially serious) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.