These 4 Measures Indicate That Hamashbir 365 (TLV:MSBI) Is Using Debt Extensively

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. As with many other companies Hamashbir 365 Ltd (TLV:MSBI) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Hamashbir 365

How Much Debt Does Hamashbir 365 Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Hamashbir 365 had ₪76.1m of debt, an increase on ₪71.6m, over one year. However, its balance sheet shows it holds ₪118.9m in cash, so it actually has ₪42.7m net cash.

How Strong Is Hamashbir 365's Balance Sheet?

We can see from the most recent balance sheet that Hamashbir 365 had liabilities of ₪468.4m falling due within a year, and liabilities of ₪1.05b due beyond that. Offsetting these obligations, it had cash of ₪118.9m as well as receivables valued at ₪106.9m due within 12 months. So its liabilities total ₪1.29b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₪128.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Hamashbir 365 would likely require a major re-capitalisation if it had to pay its creditors today. 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 30% 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Hamashbir 365 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. Happily for any shareholders, Hamashbir 365 actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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 ₪42.7m. The cherry on top was that in converted 132% of that EBIT to free cash flow, bringing in ₪42m. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Hamashbir 365 (of which 1 is a bit unpleasant!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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