These 4 Measures Indicate That Hagag Group Real Estate Entrepreneurship (TLV:HGG) Is Using Debt Extensively

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Hagag Group Real Estate Entrepreneurship Ltd (TLV:HGG) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hagag Group Real Estate Entrepreneurship

What Is Hagag Group Real Estate Entrepreneurship's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Hagag Group Real Estate Entrepreneurship had ₪1.02b of debt, an increase on ₪774.4m, over one year. However, it also had ₪70.0m in cash, and so its net debt is ₪949.3m.

A Look At Hagag Group Real Estate Entrepreneurship's Liabilities

We can see from the most recent balance sheet that Hagag Group Real Estate Entrepreneurship had liabilities of ₪1.11b falling due within a year, and liabilities of ₪206.1m due beyond that. On the other hand, it had cash of ₪70.0m and ₪309.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪937.7m.

While this might seem like a lot, it is not so bad since Hagag Group Real Estate Entrepreneurship has a market capitalization of ₪1.76b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

With a net debt to EBITDA ratio of 8.8, it's fair to say Hagag Group Real Estate Entrepreneurship does have a significant amount of debt. But the good news is that it boasts fairly comforting interest cover of 5.1 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 110% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Hagag Group Real Estate Entrepreneurship's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by 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

Neither Hagag Group Real Estate Entrepreneurship's ability to convert EBIT to free cash flow nor its net debt to EBITDA gave us confidence in its ability to take on more debt. But its EBIT growth rate tells a very different story, and suggests some resilience. When we consider all the factors discussed, it seems to us that Hagag Group Real Estate Entrepreneurship is taking some risks with its use of debt. While that debt can boost returns, we think the company has enough leverage now. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Hagag Group Real Estate Entrepreneurship has 5 warning signs (and 3 which don't sit too well with us) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.