Is Hamashbir 365 (TLV:MSBI) A Risky Investment?

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 Hamashbir 365 Ltd (TLV:MSBI) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hamashbir 365

What Is Hamashbir 365's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hamashbir 365 had ₪48.9m of debt in September 2022, down from ₪68.1m, one year before. But on the other hand it also has ₪70.5m in cash, leading to a ₪21.6m net cash position.

How Healthy Is Hamashbir 365's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hamashbir 365 had liabilities of ₪425.1m due within 12 months and liabilities of ₪1.00b due beyond that. On the other hand, it had cash of ₪70.5m and ₪96.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪1.26b.

This deficit casts a shadow over the ₪131.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Hamashbir 365 would probably need a major re-capitalization if its creditors were to demand repayment. Hamashbir 365 boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

We note that Hamashbir 365 grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hamashbir 365 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 company can only pay off debt with cold hard cash, not accounting profits. While Hamashbir 365 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. Over the last three years, Hamashbir 365 recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

Although Hamashbir 365's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₪21.6m. And it impressed us with free cash flow of ₪94m, being 86% of its EBIT. So although we see some areas for improvement, we're not too worried about Hamashbir 365's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Hamashbir 365 you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.