Hanan Mor Group - Holdings (TLV:HNMR) 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.' 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 Hanan Mor Group - Holdings Ltd (TLV:HNMR) 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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hanan Mor Group - Holdings

How Much Debt Does Hanan Mor Group - Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Hanan Mor Group - Holdings had ₪1.42b of debt, an increase on ₪962.3m, over one year. On the flip side, it has ₪170.8m in cash leading to net debt of about ₪1.24b.

How Strong Is Hanan Mor Group - Holdings' Balance Sheet?

We can see from the most recent balance sheet that Hanan Mor Group - Holdings had liabilities of ₪1.55b falling due within a year, and liabilities of ₪252.9m due beyond that. Offsetting these obligations, it had cash of ₪170.8m as well as receivables valued at ₪129.4m due within 12 months. So it has liabilities totalling ₪1.50b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₪946.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Hanan Mor Group - Holdings would probably need a major re-capitalization if its creditors were to demand repayment.

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.

Hanan Mor Group - Holdings shareholders face the double whammy of a high net debt to EBITDA ratio (20.6), and fairly weak interest coverage, since EBIT is just 2.5 times the interest expense. The debt burden here is substantial. One redeeming factor for Hanan Mor Group - Holdings is that it turned last year's EBIT loss into a gain of ₪56m, over 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 Hanan Mor Group - Holdings 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Hanan Mor Group - Holdings 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, Hanan Mor Group - Holdings'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 grow its EBIT isn't such a worry. Taking into account all the aforementioned factors, it looks like Hanan Mor Group - Holdings has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. 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 instance, we've identified 5 warning signs for Hanan Mor Group - Holdings (3 are a bit unpleasant) you should be aware of.

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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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.