Is Alony-Hetz Properties & Investments (TLV:ALHE) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Alony-Hetz Properties & Investments Ltd (TLV:ALHE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Alony-Hetz Properties & Investments

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

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Alony-Hetz Properties & Investments had ₪17.1b of debt, an increase on ₪14.3b, over one year. However, it does have ₪1.62b in cash offsetting this, leading to net debt of about ₪15.4b.

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

The latest balance sheet data shows that Alony-Hetz Properties & Investments had liabilities of ₪2.55b due within a year, and liabilities of ₪18.4b falling due after that. Offsetting these obligations, it had cash of ₪1.62b as well as receivables valued at ₪376.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪19.0b.

This deficit casts a shadow over the ₪8.08b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Alony-Hetz Properties & Investments would likely require a major re-capitalisation if it had to pay its creditors today.

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).

With a net debt to EBITDA ratio of 13.4, it's fair to say Alony-Hetz Properties & Investments does have a significant amount of debt. However, its interest coverage of 3.1 is reasonably strong, which is a good sign. Notably, Alony-Hetz Properties & Investments's EBIT was pretty flat over the last year, which isn't ideal given the debt load. 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 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 we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Alony-Hetz Properties & Investments burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both Alony-Hetz Properties & Investments's conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. Having said that, its ability to grow its EBIT isn't such a worry. Taking into account all the aforementioned factors, it looks like Alony-Hetz Properties & Investments has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. 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. Be aware that Alony-Hetz Properties & Investments is showing 3 warning signs in our investment analysis , and 2 of those are significant...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.