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

Warren Buffett famously said, '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. Importantly, Alony-Hetz Properties & Investments Ltd (TLV:ALHE) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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?

As you can see below, at the end of September 2022, Alony-Hetz Properties & Investments had ₪16.7b of debt, up from ₪15.3b a year ago. Click the image for more detail. On the flip side, it has ₪1.28b in cash leading to net debt of about ₪15.4b.

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

We can see from the most recent balance sheet that Alony-Hetz Properties & Investments had liabilities of ₪2.61b falling due within a year, and liabilities of ₪18.1b due beyond that. Offsetting these obligations, it had cash of ₪1.28b as well as receivables valued at ₪454.3m 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 ₪6.69b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. 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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Alony-Hetz Properties & Investments shareholders face the double whammy of a high net debt to EBITDA ratio (17.4), and fairly weak interest coverage, since EBIT is just 1.7 times the interest expense. The debt burden here is substantial. Worse, Alony-Hetz Properties & Investments's EBIT was down 26% over the last year. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Alony-Hetz Properties & Investments 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

On the face of it, Alony-Hetz Properties & Investments's EBIT growth rate 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 even its net debt to EBITDA fails to inspire much confidence. Considering everything we've mentioned above, it's fair to say that Alony-Hetz Properties & Investments is carrying heavy debt load. If you play with fire you risk getting burnt, so we'd probably give this stock a wide berth. 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 3 warning signs for Alony-Hetz Properties & Investments (of which 1 is a bit concerning!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.