Alony-Hetz Properties & Investments (TLV:ALHE) Use Of Debt Could Be Considered Risky

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Alony-Hetz Properties & Investments Ltd (TLV:ALHE) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Alony-Hetz Properties & Investments

What Is Alony-Hetz Properties & Investments's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Alony-Hetz Properties & Investments had debt of ₪13.6b, up from ₪12.9b in one year. However, it does have ₪2.21b in cash offsetting this, leading to net debt of about ₪11.4b.

How Healthy Is Alony-Hetz Properties & Investments' Balance Sheet?

According to the last reported balance sheet, Alony-Hetz Properties & Investments had liabilities of ₪1.78b due within 12 months, and liabilities of ₪14.8b due beyond 12 months. Offsetting these obligations, it had cash of ₪2.21b as well as receivables valued at ₪154.7m due within 12 months. So it has liabilities totalling ₪14.2b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₪7.46b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Alony-Hetz Properties & Investments would probably need a major re-capitalization if its creditors were to demand repayment.

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.

With a net debt to EBITDA ratio of 9.5, it's fair to say Alony-Hetz Properties & Investments does have a significant amount of debt. But the good news is that it boasts fairly comforting interest cover of 4.0 times, suggesting it can responsibly service its obligations. Another concern for investors might be that Alony-Hetz Properties & Investments's EBIT fell 16% in the last year. If things keep going like that, handling the debt will about as easy as bundling an angry house cat into its travel box. When analysing debt levels, the balance sheet is the obvious place to start. But it is Alony-Hetz Properties & Investments's earnings that will influence how the balance sheet holds up in the future. 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 we always check how much of that EBIT is translated into free cash flow. Over the last three years, Alony-Hetz Properties & 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, Alony-Hetz Properties & 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. And furthermore, its EBIT growth rate also fails to instill confidence. We think the chances that Alony-Hetz Properties & Investments has too much debt a very significant. To our minds, that means the stock is rather high risk, and probably one to avoid; but to each their own (investing) style. 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 4 warning signs with Alony-Hetz Properties & Investments (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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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