These 4 Measures Indicate That Maman-Cargo Terminals & Handling (TLV:MMAN) Is Using Debt Extensively

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. As with many other companies Maman-Cargo Terminals & Handling Ltd. (TLV:MMAN) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Maman-Cargo Terminals & Handling

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

The image below, which you can click on for greater detail, shows that at September 2020 Maman-Cargo Terminals & Handling had debt of ₪510.8m, up from ₪420.7m in one year. However, it does have ₪252.9m in cash offsetting this, leading to net debt of about ₪257.9m.

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

Zooming in on the latest balance sheet data, we can see that Maman-Cargo Terminals & Handling had liabilities of ₪395.9m due within 12 months and liabilities of ₪965.9m due beyond that. Offsetting this, it had ₪252.9m in cash and ₪231.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪877.5m.

The deficiency here weighs heavily on the ₪285.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. 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 use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

While Maman-Cargo Terminals & Handling's debt to EBITDA ratio (2.8) suggests that it uses some debt, its interest cover is very weak, at 1.7, suggesting high leverage. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. Notably, Maman-Cargo Terminals & Handling's EBIT was pretty flat over the last year, which isn't ideal given the debt load. 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. During the last three years, Maman-Cargo Terminals & Handling produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

To be frank both Maman-Cargo Terminals & Handling's interest cover and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. We should also note that Infrastructure industry companies like Maman-Cargo Terminals & Handling commonly do use debt without problems. Looking at the bigger picture, it seems clear to us that Maman-Cargo Terminals & Handling's use of debt is creating risks for the company. 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 Maman-Cargo Terminals & Handling has 5 warning signs (and 2 which are potentially serious) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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