Hilan (TLV:HLAN) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Hilan Ltd. (TLV:HLAN) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hilan

What Is Hilan's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Hilan had ₪219.4m of debt, an increase on ₪132.2m, over one year. But on the other hand it also has ₪238.2m in cash, leading to a ₪18.8m net cash position.

How Healthy Is Hilan's Balance Sheet?

We can see from the most recent balance sheet that Hilan had liabilities of ₪800.1m falling due within a year, and liabilities of ₪198.0m due beyond that. Offsetting these obligations, it had cash of ₪238.2m as well as receivables valued at ₪686.2m due within 12 months. So its liabilities total ₪73.6m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Hilan's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₪4.14b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Hilan boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Hilan grew its EBIT at 11% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hilan 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 Hilan 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, Hilan actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hilan has ₪18.8m in net cash. The cherry on top was that in converted 126% of that EBIT to free cash flow, bringing in ₪257m. So we don't think Hilan's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Hilan's earnings per share history for free.

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.