A. Libental Holdings (TLV:LBTL) Has Debt But No Earnings; Should You Worry?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies A. Libental Holdings Ltd. (TLV:LBTL) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for A. Libental Holdings

What Is A. Libental Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2021 A. Libental Holdings had debt of ₪252.2m, up from ₪156.4m in one year. However, it does have ₪65.1m in cash offsetting this, leading to net debt of about ₪187.2m.

How Strong Is A. Libental Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that A. Libental Holdings had liabilities of ₪172.6m due within 12 months and liabilities of ₪146.9m due beyond that. Offsetting these obligations, it had cash of ₪65.1m as well as receivables valued at ₪27.6m due within 12 months. So it has liabilities totalling ₪226.9m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₪156.7m, we think shareholders really should watch A. Libental Holdings's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is A. Libental Holdings'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.

It seems likely shareholders hope that A. Libental Holdings can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

Importantly, A. Libental Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₪5.5m at the EBIT level. 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 ₪18m over the last twelve months. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for A. Libental Holdings (1 is a bit concerning) you should be aware of.

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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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.