Is Mivne Real Estate (K.D) (TLV:MVNE) Using Too Much Debt?

Warren Buffett famously said, '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. We note that Mivne Real Estate (K.D) Ltd (TLV:MVNE) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Mivne Real Estate (K.D)

How Much Debt Does Mivne Real Estate (K.D) Carry?

You can click the graphic below for the historical numbers, but it shows that Mivne Real Estate (K.D) had ₪5.49b of debt in September 2020, down from ₪5.92b, one year before. However, it does have ₪587.8m in cash offsetting this, leading to net debt of about ₪4.91b.

How Healthy Is Mivne Real Estate (K.D)'s Balance Sheet?

According to the last reported balance sheet, Mivne Real Estate (K.D) had liabilities of ₪912.0m due within 12 months, and liabilities of ₪6.21b due beyond 12 months. Offsetting this, it had ₪587.8m in cash and ₪308.7m in receivables that were due within 12 months. So its liabilities total ₪6.22b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₪6.33b, so it does suggest shareholders should keep an eye on Mivne Real Estate (K.D)'s use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With a net debt to EBITDA ratio of 7.1, it's fair to say Mivne Real Estate (K.D) does have a significant amount of debt. However, its interest coverage of 4.5 is reasonably strong, which is a good sign. Shareholders should be aware that Mivne Real Estate (K.D)'s EBIT was down 20% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mivne Real Estate (K.D)'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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 most recent three years, Mivne Real Estate (K.D) recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

To be frank both Mivne Real Estate (K.D)'s net debt to EBITDA and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. We're quite clear that we consider Mivne Real Estate (K.D) to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. For instance, we've identified 2 warning signs for Mivne Real Estate (K.D) (1 is concerning) you should be aware of.

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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