Hilan (TLV:HLAN) Seems To Use Debt Rather Sparingly

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. As with many other companies Hilan Ltd. (TLV:HLAN) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hilan

What Is Hilan's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hilan had ₪119.7m of debt in June 2021, down from ₪180.6m, one year before. But it also has ₪218.9m in cash to offset that, meaning it has ₪99.2m net cash.

A Look At Hilan's Liabilities

We can see from the most recent balance sheet that Hilan had liabilities of ₪648.3m falling due within a year, and liabilities of ₪175.3m due beyond that. Offsetting these obligations, it had cash of ₪218.9m as well as receivables valued at ₪579.8m due within 12 months. So it has liabilities totalling ₪24.9m more than its cash and near-term receivables, combined.

Having regard to Hilan's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₪4.06b company is struggling for cash, we still think it's worth monitoring its 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 15% over the last year, further increasing its ability to manage 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 Hilan will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, Hilan actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about Hilan's liabilities, but we can be reassured by the fact it has has net cash of ₪99.2m. The cherry on top was that in converted 109% of that EBIT to free cash flow, bringing in ₪279m. So we don't think Hilan's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Hilan, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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