We Think Hamashbir 365 (TLV:MSBI) Is Taking Some Risk With Its Debt

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.' 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 real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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?

The image below, which you can click on for greater detail, shows that Hamashbir 365 had debt of ₪25.5m at the end of March 2024, a reduction from ₪56.5m over a year. But it also has ₪67.2m in cash to offset that, meaning it has ₪41.7m 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 ₪402.9m falling due within a year, and liabilities of ₪890.5m due beyond that. On the other hand, it had cash of ₪67.2m and ₪87.9m worth of receivables due within a year. So it has liabilities totalling ₪1.14b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₪195.3m company, like a colossus towering over mere mortals. 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. Given that Hamashbir 365 has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

If Hamashbir 365 can keep growing EBIT at last year's rate of 16% over the last year, then it will find its debt load easier to manage. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hamashbir 365'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 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 ₪41.7m. The cherry on top was that in converted 106% of that EBIT to free cash flow, bringing in ₪122m. 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Hamashbir 365 , and understanding them should be part of your investment process.

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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com