Stock Analysis

Azrieli Group (TLV:AZRG) Takes On Some Risk With Its Use Of Debt

TASE:AZRG
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Azrieli Group Ltd (TLV:AZRG) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Azrieli Group

What Is Azrieli Group's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Azrieli Group had debt of ₪11.9b, up from ₪10.1b in one year. On the flip side, it has ₪2.74b in cash leading to net debt of about ₪9.20b.

debt-equity-history-analysis
TASE:AZRG Debt to Equity History February 14th 2021

How Healthy Is Azrieli Group's Balance Sheet?

The latest balance sheet data shows that Azrieli Group had liabilities of ₪2.89b due within a year, and liabilities of ₪14.2b falling due after that. Offsetting this, it had ₪2.74b in cash and ₪598.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪13.7b.

While this might seem like a lot, it is not so bad since Azrieli Group has a market capitalization of ₪24.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

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.

As it happens Azrieli Group has a fairly concerning net debt to EBITDA ratio of 7.5 but very strong interest coverage of 16.2. This means that unless the company has access to very cheap debt, that interest expense will likely grow in the future. Shareholders should be aware that Azrieli Group's EBIT was down 22% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Azrieli Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Azrieli Group recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

While Azrieli Group's EBIT growth rate has us nervous. To wit both its interest cover and conversion of EBIT to free cash flow were encouraging signs. We think that Azrieli Group's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Azrieli Group .

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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