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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Hamashbir 365 Ltd (TLV:MSBI) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hamashbir 365

What Is Hamashbir 365's Debt?

As you can see below, at the end of June 2021, Hamashbir 365 had ₪68.7m of debt, up from ₪65.1m a year ago. Click the image for more detail. However, it does have ₪81.3m in cash offsetting this, leading to net cash of ₪12.6m.

How Healthy Is Hamashbir 365's Balance Sheet?

We can see from the most recent balance sheet that Hamashbir 365 had liabilities of ₪431.3m falling due within a year, and liabilities of ₪1.03b due beyond that. Offsetting this, it had ₪81.3m in cash and ₪88.2m in receivables that were 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 ₪301.8m 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'd watch its balance sheet closely, without a doubt. 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.

Also relevant is that Hamashbir 365 has grown its EBIT by a very respectable 23% in the last year, thus enhancing its ability to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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. 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. Over the last three years, Hamashbir 365 actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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 ₪12.6m. And it impressed us with free cash flow of ₪29m, being 101% of its EBIT. So although we see some areas for improvement, we're not too worried about Hamashbir 365's balance sheet. 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. To that end, you should learn about the 3 warning signs we've spotted with Hamashbir 365 (including 1 which is a bit unpleasant) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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