Is Hilan (TLV:HLAN) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Hilan Ltd. (TLV:HLAN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hilan

What Is Hilan's Net Debt?

The image below, which you can click on for greater detail, shows that Hilan had debt of ₪132.2m at the end of March 2021, a reduction from ₪147.4m over a year. However, it does have ₪172.0m in cash offsetting this, leading to net cash of ₪39.8m.

How Healthy Is Hilan's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hilan had liabilities of ₪613.7m due within 12 months and liabilities of ₪190.8m due beyond that. Offsetting this, it had ₪172.0m in cash and ₪563.6m in receivables that were due within 12 months. So its liabilities total ₪69.0m more than the combination of its cash and short-term receivables.

Having regard to Hilan's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₪3.76b 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!

And we also note warmly that Hilan grew its EBIT by 11% last year, making its debt load easier to handle. 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 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. Hilan 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. During the last three years, Hilan generated free cash flow amounting to a very robust 98% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hilan has ₪39.8m in net cash. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in ₪258m. So is Hilan's debt a risk? It doesn't seem so to us. 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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