Does Y.H. Dimri Construction & Development (TLV:DIMRI) Have A Healthy Balance Sheet?

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 Y.H. Dimri Construction & Development Ltd (TLV:DIMRI) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Y.H. Dimri Construction & Development

How Much Debt Does Y.H. Dimri Construction & Development Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Y.H. Dimri Construction & Development had ₪2.24b of debt, an increase on ₪1.69b, over one year. However, it does have ₪204.0m in cash offsetting this, leading to net debt of about ₪2.04b.

A Look At Y.H. Dimri Construction & Development's Liabilities

The latest balance sheet data shows that Y.H. Dimri Construction & Development had liabilities of ₪794.5m due within a year, and liabilities of ₪1.87b falling due after that. Offsetting these obligations, it had cash of ₪204.0m as well as receivables valued at ₪402.1m due within 12 months. So it has liabilities totalling ₪2.06b more than its cash and near-term receivables, combined.

Y.H. Dimri Construction & Development has a market capitalization of ₪3.53b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

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 7.6, it's fair to say Y.H. Dimri Construction & Development does have a significant amount of debt. But the good news is that it boasts fairly comforting interest cover of 4.6 times, suggesting it can responsibly service its obligations. We note that Y.H. Dimri Construction & Development grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. 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 Y.H. Dimri Construction & Development will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Y.H. Dimri Construction & Development 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 Y.H. Dimri Construction & Development's net debt to EBITDA and its track record of converting EBIT to free cash flow make us rather uncomfortable with its debt levels. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Y.H. Dimri Construction & Development stock a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. 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. Be aware that Y.H. Dimri Construction & Development is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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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