Does Kardan Real Estate Enterprise and Development (TLV:KARE) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Kardan Real Estate Enterprise and Development Ltd. (TLV:KARE) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Kardan Real Estate Enterprise and Development

How Much Debt Does Kardan Real Estate Enterprise and Development Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Kardan Real Estate Enterprise and Development had debt of ₪354.7m, up from ₪280.1m in one year. However, because it has a cash reserve of ₪275.9m, its net debt is less, at about ₪78.8m.

How Strong Is Kardan Real Estate Enterprise and Development's Balance Sheet?

The latest balance sheet data shows that Kardan Real Estate Enterprise and Development had liabilities of ₪349.7m due within a year, and liabilities of ₪228.4m falling due after that. On the other hand, it had cash of ₪275.9m and ₪94.5m worth of receivables due within a year. So its liabilities total ₪207.7m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Kardan Real Estate Enterprise and Development is worth ₪470.2m, 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.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its 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).

Kardan Real Estate Enterprise and Development's net debt to EBITDA ratio of about 1.5 suggests only moderate use of debt. And its strong interest cover of 13.2 times, makes us even more comfortable. And we also note warmly that Kardan Real Estate Enterprise and Development grew its EBIT by 19% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Kardan Real Estate Enterprise and Development'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 it's worth checking how much of that EBIT is backed by free cash flow. Considering the last three years, Kardan Real Estate Enterprise and Development actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

On our analysis Kardan Real Estate Enterprise and Development's interest cover should signal that it won't have too much trouble with its debt. But the other factors we noted above weren't so encouraging. To be specific, it seems about as good at converting EBIT to free cash flow as wet socks are at keeping your feet warm. When we consider all the factors mentioned above, we do feel a bit cautious about Kardan Real Estate Enterprise and Development's use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Kardan Real Estate Enterprise and Development is showing 5 warning signs in our investment analysis , and 2 of those are a bit concerning...

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.

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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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