Is Inter Industries Plus (TLV:ININ) Using Debt In A Risky Way?

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.' 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. We can see that Inter Industries Plus Ltd (TLV:ININ) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Inter Industries Plus

What Is Inter Industries Plus's Debt?

The image below, which you can click on for greater detail, shows that Inter Industries Plus had debt of ₪37.7m at the end of September 2024, a reduction from ₪79.1m over a year. But on the other hand it also has ₪43.7m in cash, leading to a ₪6.07m net cash position.

A Look At Inter Industries Plus' Liabilities

Zooming in on the latest balance sheet data, we can see that Inter Industries Plus had liabilities of ₪281.9m due within 12 months and liabilities of ₪74.6m due beyond that. Offsetting these obligations, it had cash of ₪43.7m as well as receivables valued at ₪309.5m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Since publicly traded Inter Industries Plus shares are worth a total of ₪120.8m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Inter Industries Plus boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Inter Industries Plus 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.

Over 12 months, Inter Industries Plus made a loss at the EBIT level, and saw its revenue drop to ₪697m, which is a fall of 4.1%. That's not what we would hope to see.

So How Risky Is Inter Industries Plus?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Inter Industries Plus had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₪29m of cash and made a loss of ₪47m. But at least it has ₪6.07m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Inter Industries Plus you should be aware of, and 3 of them are concerning.

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.