Y.H. Dimri Construction & Development (TLV:DIMRI) Seems To Be Using A Lot Of 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.' 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, Y.H. Dimri Construction & Development Ltd (TLV:DIMRI) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

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

What Is Y.H. Dimri Construction & Development's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Y.H. Dimri Construction & Development had ₪2.16b of debt, an increase on ₪1.67b, over one year. However, because it has a cash reserve of ₪143.1m, its net debt is less, at about ₪2.02b.

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

According to the last reported balance sheet, Y.H. Dimri Construction & Development had liabilities of ₪1.10b due within 12 months, and liabilities of ₪1.41b due beyond 12 months. Offsetting these obligations, it had cash of ₪143.1m as well as receivables valued at ₪417.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪1.95b.

This is a mountain of leverage relative to its market capitalization of ₪2.41b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Y.H. Dimri Construction & Development has a rather high debt to EBITDA ratio of 9.1 which suggests a meaningful debt load. But the good news is that it boasts fairly comforting interest cover of 4.3 times, suggesting it can responsibly service its obligations. Another concern for investors might be that Y.H. Dimri Construction & Development's EBIT fell 15% in the last year. If that's the way things keep going handling the debt load will be like delivering hot coffees on a pogo stick. There's no doubt that we learn most about debt from the balance sheet. 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 we always check how much of that EBIT is translated into free cash flow. Over the last three years, Y.H. Dimri Construction & Development saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Y.H. Dimri Construction & Development's net debt to EBITDA left us tentative about the stock, and its conversion of EBIT to free cash flow was no more enticing than the one empty restaurant on the busiest night of the year. Having said that, its ability to cover its interest expense with its EBIT isn't such a worry. Taking into account all the aforementioned factors, it looks like Y.H. Dimri Construction & Development has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Y.H. Dimri Construction & Development (of which 1 is a bit unpleasant!) 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.

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