Does Prashkovsky Investments and Construction (TLV:PRSK) Have A Healthy Balance Sheet?

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.' 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 Prashkovsky Investments and Construction Ltd. (TLV:PRSK) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Prashkovsky Investments and Construction

How Much Debt Does Prashkovsky Investments and Construction Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Prashkovsky Investments and Construction had ₪2.55b of debt, an increase on ₪1.83b, over one year. However, because it has a cash reserve of ₪234.0m, its net debt is less, at about ₪2.31b.

How Strong Is Prashkovsky Investments and Construction's Balance Sheet?

We can see from the most recent balance sheet that Prashkovsky Investments and Construction had liabilities of ₪2.15b falling due within a year, and liabilities of ₪1.14b due beyond that. On the other hand, it had cash of ₪234.0m and ₪264.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪2.79b.

Given this deficit is actually higher than the company's market capitalization of ₪1.97b, we think shareholders really should watch Prashkovsky Investments and Construction'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.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Strangely Prashkovsky Investments and Construction has a sky high EBITDA ratio of 12.5, implying high debt, but a strong interest coverage of 11.4. So either it has access to very cheap long term debt or that interest expense is going to grow! Shareholders should be aware that Prashkovsky Investments and Construction's EBIT was down 37% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Prashkovsky Investments and Construction'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 the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Prashkovsky Investments and Construction burned a lot of cash. 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 Prashkovsky Investments and Construction's conversion of EBIT to free cash flow and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. After considering the datapoints discussed, we think Prashkovsky Investments and Construction has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. 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. For example, we've discovered 3 warning signs for Prashkovsky Investments and Construction (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.