Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that Shemen Yielding Real Estate Ltd (TLV:SMNR) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Shemen Yielding Real Estate's Debt?
As you can see below, at the end of September 2025, Shemen Yielding Real Estate had ₪340.9m of debt, up from ₪45.5m a year ago. Click the image for more detail. However, because it has a cash reserve of ₪8.08m, its net debt is less, at about ₪332.8m.
A Look At Shemen Yielding Real Estate's Liabilities
According to the last reported balance sheet, Shemen Yielding Real Estate had liabilities of ₪51.0m due within 12 months, and liabilities of ₪381.4m due beyond 12 months. Offsetting this, it had ₪8.08m in cash and ₪4.04m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪420.2m.
This is a mountain of leverage relative to its market capitalization of ₪560.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.
View our latest analysis for Shemen Yielding Real Estate
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). 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).
Shemen Yielding Real Estate shareholders face the double whammy of a high net debt to EBITDA ratio (49.0), and fairly weak interest coverage, since EBIT is just 0.90 times the interest expense. The debt burden here is substantial. However, the silver lining was that Shemen Yielding Real Estate achieved a positive EBIT of ₪6.7m in the last twelve months, an improvement on the prior year's loss. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shemen Yielding Real Estate'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Looking at the most recent year, Shemen Yielding Real Estate recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
Our View
On the face of it, Shemen Yielding Real Estate's net debt to EBITDA left us tentative about the stock, and its interest cover was no more enticing than the one empty restaurant on the busiest night of the year. But at least its conversion of EBIT to free cash flow is not so bad. Overall, we think it's fair to say that Shemen Yielding Real Estate has enough debt that there are some real risks around the balance sheet. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shemen Yielding Real Estate you should know about.
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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