Is Bonei Hatichon Civil Engineering & Infrastructures (TLV:BOTI) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Bonei Hatichon Civil Engineering & Infrastructures Ltd. (TLV:BOTI) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Bonei Hatichon Civil Engineering & Infrastructures

What Is Bonei Hatichon Civil Engineering & Infrastructures's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Bonei Hatichon Civil Engineering & Infrastructures had ₪246.3m of debt in September 2020, down from ₪276.1m, one year before. But on the other hand it also has ₪295.8m in cash, leading to a ₪49.5m net cash position.

How Healthy Is Bonei Hatichon Civil Engineering & Infrastructures' Balance Sheet?

The latest balance sheet data shows that Bonei Hatichon Civil Engineering & Infrastructures had liabilities of ₪639.3m due within a year, and liabilities of ₪5.52m falling due after that. On the other hand, it had cash of ₪295.8m and ₪4.02m worth of receivables due within a year. So its liabilities total ₪345.0m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₪339.2m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Bonei Hatichon Civil Engineering & Infrastructures boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Bonei Hatichon Civil Engineering & Infrastructures will need earnings to service that debt. 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.

Over 12 months, Bonei Hatichon Civil Engineering & Infrastructures reported revenue of ₪242m, which is a gain of 56%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Bonei Hatichon Civil Engineering & Infrastructures?

While Bonei Hatichon Civil Engineering & Infrastructures lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₪226m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive was the revenue growth of 56% over the last year. But we genuinely do think the balance sheet is a risky. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Bonei Hatichon Civil Engineering & Infrastructures (at least 1 which is concerning) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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