Here's Why Maman-Cargo Terminals & Handling (TLV:MMAN) Has A Meaningful Debt Burden

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.' 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 can see that Maman-Cargo Terminals & Handling Ltd. (TLV:MMAN) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Maman-Cargo Terminals & Handling

What Is Maman-Cargo Terminals & Handling's Debt?

As you can see below, at the end of September 2020, Maman-Cargo Terminals & Handling had ₪510.8m of debt, up from ₪420.7m a year ago. Click the image for more detail. However, because it has a cash reserve of ₪252.9m, its net debt is less, at about ₪257.9m.

A Look At Maman-Cargo Terminals & Handling's Liabilities

According to the last reported balance sheet, Maman-Cargo Terminals & Handling had liabilities of ₪395.9m due within 12 months, and liabilities of ₪965.9m due beyond 12 months. Offsetting these obligations, it had cash of ₪252.9m as well as receivables valued at ₪231.6m due within 12 months. So it has liabilities totalling ₪877.5m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₪289.8m 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, Maman-Cargo Terminals & Handling would probably need a major re-capitalization if its creditors were to demand repayment.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

While we wouldn't worry about Maman-Cargo Terminals & Handling's net debt to EBITDA ratio of 2.8, we think its super-low interest cover of 1.7 times is a sign of high leverage. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. Given the debt load, it's hardly ideal that Maman-Cargo Terminals & Handling's EBIT was pretty flat over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Maman-Cargo Terminals & Handling'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. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, Maman-Cargo Terminals & Handling recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

On the face of it, Maman-Cargo Terminals & Handling's interest cover left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. We should also note that Infrastructure industry companies like Maman-Cargo Terminals & Handling commonly do use debt without problems. Overall, we think it's fair to say that Maman-Cargo Terminals & Handling has enough debt that there are some real risks around the balance sheet. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Maman-Cargo Terminals & Handling (2 are a bit unpleasant!) that you should be aware of before investing here.

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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