Hiron-Trade Investments & Industrial Buildings (TLV:HRON) Has A Pretty Healthy Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Hiron-Trade Investments & Industrial Buildings Ltd (TLV:HRON) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Hiron-Trade Investments & Industrial Buildings

How Much Debt Does Hiron-Trade Investments & Industrial Buildings Carry?

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 Strong Is Hiron-Trade Investments & Industrial Buildings's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hiron-Trade Investments & Industrial Buildings had liabilities of ₪154.5m due within 12 months and liabilities of ₪149.3m due beyond that. Offsetting this, it had ₪67.0k in cash and ₪35.7m in receivables that were due within 12 months. So it has liabilities totalling ₪268.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Hiron-Trade Investments & Industrial Buildings has a market capitalization of ₪687.9m, 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 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.

Hiron-Trade Investments & Industrial Buildings's net debt to EBITDA ratio of about 2.5 suggests only moderate use of 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 you can't view debt in total isolation; since Hiron-Trade Investments & Industrial Buildings 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Hiron-Trade Investments & Industrial Buildings recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

Happily, Hiron-Trade Investments & Industrial Buildings's impressive interest cover implies it has the upper hand on its debt. But truth be told we feel its net debt to EBITDA 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Hiron-Trade Investments & Industrial Buildings that you should be aware of before investing here.

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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