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

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Maman- Cargo Terminals & Handling Ltd (TLV:MMAN) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that MMAN is potentially undervalued!

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

As you can see below, at the end of September 2022, Maman- Cargo Terminals & Handling had ₪467.4m of debt, up from ₪403.1m a year ago. Click the image for more detail. However, it also had ₪242.2m in cash, and so its net debt is ₪225.2m.

How Healthy Is Maman- Cargo Terminals & Handling's Balance Sheet?

We can see from the most recent balance sheet that Maman- Cargo Terminals & Handling had liabilities of ₪436.0m falling due within a year, and liabilities of ₪1.12b due beyond that. On the other hand, it had cash of ₪242.2m and ₪296.4m worth of receivables due within a year. So its liabilities total ₪1.01b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₪457.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Maman- Cargo Terminals & Handling would likely require a major re-capitalisation if it had to pay its creditors today.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While Maman- Cargo Terminals & Handling has a quite reasonable net debt to EBITDA multiple of 1.5, its interest cover seems weak, at 1.9. This does suggest the company is paying fairly high interest rates. In any case, it's safe to say the company has meaningful debt. It is well worth noting that Maman- Cargo Terminals & Handling's EBIT shot up like bamboo after rain, gaining 66% in the last twelve months. That'll make it easier to manage its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Maman- Cargo Terminals & Handling will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Happily for any shareholders, Maman- Cargo Terminals & Handling actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

While Maman- Cargo Terminals & Handling's level of total liabilities has us nervous. For example, its conversion of EBIT to free cash flow and EBIT growth rate give us some confidence in its ability to manage its debt. We think that Maman- Cargo Terminals & Handling's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Maman- Cargo Terminals & Handling (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.