Is Kardan Real Estate Enterprise and Development (TLV:KARE) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Kardan Real Estate Enterprise and Development Ltd. (TLV:KARE) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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

What Is Kardan Real Estate Enterprise and Development's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Kardan Real Estate Enterprise and Development had ₪441.2m of debt, an increase on ₪354.7m, over one year. However, it does have ₪468.9m in cash offsetting this, leading to net cash of ₪27.7m.

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 ₪341.8m due within a year, and liabilities of ₪372.5m falling due after that. Offsetting this, it had ₪468.9m in cash and ₪143.8m in receivables that were due within 12 months. So it has liabilities totalling ₪101.6m more than its cash and near-term receivables, combined.

Of course, Kardan Real Estate Enterprise and Development has a market capitalization of ₪1.10b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Kardan Real Estate Enterprise and Development also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Kardan Real Estate Enterprise and Development grew its EBIT by 84% over the last twelve months, and that growth will make it easier to handle 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 Kardan Real Estate Enterprise and Development 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Kardan Real Estate Enterprise and Development has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Kardan Real Estate Enterprise and Development recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Kardan Real Estate Enterprise and Development has ₪27.7m in net cash. And we liked the look of last year's 84% year-on-year EBIT growth. So we don't have any problem with Kardan Real Estate Enterprise and Development's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 3 warning signs in our investment analysis , and 1 of those is 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. 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.