Is Hanan Mor Group - Holdings (TLV:HNMR) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Hanan Mor Group - Holdings Ltd. (TLV:HNMR) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hanan Mor Group - Holdings

How Much Debt Does Hanan Mor Group - Holdings Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Hanan Mor Group - Holdings had debt of ₪962.3m, up from ₪889.0m in one year. However, because it has a cash reserve of ₪161.4m, its net debt is less, at about ₪801.0m.

A Look At Hanan Mor Group - Holdings's Liabilities

We can see from the most recent balance sheet that Hanan Mor Group - Holdings had liabilities of ₪1.11b falling due within a year, and liabilities of ₪154.9m due beyond that. Offsetting this, it had ₪161.4m in cash and ₪49.8m in receivables that were due within 12 months. So it has liabilities totalling ₪1.05b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₪443.5m 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 definitely think shareholders need to watch this one closely. After all, Hanan Mor Group - Holdings would likely require a major re-capitalisation if it had to pay its creditors today. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Hanan Mor Group - Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to ₪150m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Hanan Mor Group - Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₪217k. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of ₪32m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Hanan Mor Group - Holdings (1 can't be ignored!) that you should be aware of before investing here.

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. 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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