Does Hiron-Trade Investments & Industrial Buildings (TLV:HRON) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Hiron-Trade Investments & Industrial Buildings Ltd (TLV:HRON) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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.

View our latest analysis for Hiron-Trade Investments & Industrial Buildings

What Is Hiron-Trade Investments & Industrial Buildings's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Hiron-Trade Investments & Industrial Buildings had debt of ₪130.6m, up from ₪95.1m in one year. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Hiron-Trade Investments & Industrial Buildings' Balance Sheet?

We can see from the most recent balance sheet that Hiron-Trade Investments & Industrial Buildings had liabilities of ₪154.5m falling due within a year, and liabilities of ₪149.3m due beyond that. Offsetting these obligations, it had cash of ₪67.0k as well as receivables valued at ₪35.7m due within 12 months. So it has liabilities totalling ₪268.0m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Hiron-Trade Investments & Industrial Buildings is worth ₪562.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

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).

We'd say that Hiron-Trade Investments & Industrial Buildings's moderate net debt to EBITDA ratio ( being 2.5), indicates prudence when it comes to debt. And its commanding EBIT of 24.2 times its interest expense, implies the debt load is as light as a peacock feather. It is well worth noting that Hiron-Trade Investments & Industrial Buildings's EBIT shot up like bamboo after rain, gaining 31% in the last twelve months. That'll make it easier to manage its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Hiron-Trade Investments & Industrial Buildings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Hiron-Trade Investments & Industrial Buildings generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

Hiron-Trade Investments & Industrial Buildings's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But truth be told we feel its level of total liabilities does undermine this impression a bit. Looking at the bigger picture, we think Hiron-Trade Investments & Industrial Buildings's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Hiron-Trade Investments & Industrial Buildings 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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