These 4 Measures Indicate That Mivne Real Estate (K.D) (TLV:MVNE) Is Using Debt Extensively

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Mivne Real Estate (K.D) Ltd (TLV:MVNE) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Mivne Real Estate (K.D)

What Is Mivne Real Estate (K.D)'s Net Debt?

As you can see below, Mivne Real Estate (K.D) had ₪4.90b of debt at September 2021, down from ₪5.49b a year prior. On the flip side, it has ₪191.0m in cash leading to net debt of about ₪4.70b.

A Look At Mivne Real Estate (K.D)'s Liabilities

Zooming in on the latest balance sheet data, we can see that Mivne Real Estate (K.D) had liabilities of ₪868.4m due within 12 months and liabilities of ₪5.82b due beyond that. Offsetting this, it had ₪191.0m in cash and ₪149.2m in receivables that were due within 12 months. So its liabilities total ₪6.35b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₪10.5b, so it does suggest shareholders should keep an eye on Mivne Real Estate (K.D)'s use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

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 7.6, it's fair to say Mivne Real Estate (K.D) does have a significant amount of debt. However, its interest coverage of 4.6 is reasonably strong, which is a good sign. Unfortunately, Mivne Real Estate (K.D) saw its EBIT slide 8.7% in the last twelve months. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Mivne Real Estate (K.D) produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Mivne Real Estate (K.D)'s net debt to EBITDA was a real negative on this analysis, although the other factors we considered cast it in a significantly better light. In particular, its conversion of EBIT to free cash flow was re-invigorating. When we consider all the factors discussed, it seems to us that Mivne Real Estate (K.D) is taking some risks with its use of debt. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. 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 example Mivne Real Estate (K.D) has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.