We Think Summit Real Estate Holdings (TLV:SMT) Can Stay On Top Of Its 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.' 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. Importantly, Summit Real Estate Holdings Ltd. (TLV:SMT) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Summit Real Estate Holdings

What Is Summit Real Estate Holdings's Debt?

The image below, which you can click on for greater detail, shows that Summit Real Estate Holdings had debt of ₪2.56b at the end of June 2021, a reduction from ₪3.63b over a year. But on the other hand it also has ₪2.78b in cash, leading to a ₪217.7m net cash position.

How Strong Is Summit Real Estate Holdings' Balance Sheet?

The latest balance sheet data shows that Summit Real Estate Holdings had liabilities of ₪294.9m due within a year, and liabilities of ₪2.98b falling due after that. Offsetting this, it had ₪2.78b in cash and ₪45.3m in receivables that were due within 12 months. So it has liabilities totalling ₪453.0m more than its cash and near-term receivables, combined.

Given Summit Real Estate Holdings has a market capitalization of ₪4.31b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Summit Real Estate Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, Summit Real Estate Holdings is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 107% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Summit Real Estate Holdings will need earnings to service that debt. 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. Summit Real Estate Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Summit Real Estate Holdings produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While Summit Real Estate Holdings does have more liabilities than liquid assets, it also has net cash of ₪217.7m. And it impressed us with its EBIT growth of 107% over the last year. So is Summit Real Estate Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Summit Real Estate Holdings is showing 1 warning sign in our investment analysis , you should know about...

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.

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.

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