Does Hagag Group Real Estate Entrepreneurship (TLV:HGG) Have A Healthy Balance Sheet?

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 Hagag Group Real Estate Entrepreneurship Ltd (TLV:HGG) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hagag Group Real Estate Entrepreneurship

What Is Hagag Group Real Estate Entrepreneurship's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Hagag Group Real Estate Entrepreneurship had ₪776.7m of debt, an increase on ₪572.6m, over one year. However, because it has a cash reserve of ₪104.0m, its net debt is less, at about ₪672.7m.

How Healthy Is Hagag Group Real Estate Entrepreneurship's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hagag Group Real Estate Entrepreneurship had liabilities of ₪680.1m due within 12 months and liabilities of ₪307.1m due beyond that. Offsetting these obligations, it had cash of ₪104.0m as well as receivables valued at ₪103.5m due within 12 months. So it has liabilities totalling ₪779.8m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₪1.07b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Hagag Group Real Estate Entrepreneurship has a rather high debt to EBITDA ratio of 7.8 which suggests a meaningful debt load. But the good news is that it boasts fairly comforting interest cover of 5.8 times, suggesting it can responsibly service its obligations. Pleasingly, Hagag Group Real Estate Entrepreneurship is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 241% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hagag Group Real Estate Entrepreneurship 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. During the last three years, Hagag Group Real Estate Entrepreneurship 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

To be frank both Hagag Group Real Estate Entrepreneurship'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 Hagag Group Real Estate Entrepreneurship stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. 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. For instance, we've identified 2 warning signs for Hagag Group Real Estate Entrepreneurship (1 shouldn't be ignored) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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