Does Fattal Holdings (1998) (TLV: FTAL) Use Too Much Debt?
Legendary fund manager Li Lu (who Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We note that Fattal Holdings (1998) Ltd (TLV: FTAL) has debt on its balance sheet. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest analysis for Fattal Holdings (1998)
What is the debt of Fattal Holdings (1998)?
As you can see below, at the end of June 2021, Fattal Holdings (1998) had 5.53 billion yen in debt, up from 4.72 billion yen a year ago. Click on the image for more details. However, it has 1.43 billion yen in cash offsetting this, which leads to net debt of around 4.10 billion yen.
A look at the liabilities of Fattal Holdings (1998)
The latest balance sheet data show that Fattal Holdings (1998) had liabilities of 2.27 billion yen due within one year, and liabilities of 18.0 billion yen due thereafter. On the other hand, he had 1.43 billion yen in cash and 494.2 million yen in receivables due within one year. It therefore has liabilities totaling 18.4 billion yen more than its cash and short-term receivables combined.
This deficit casts a shadow over society ₪ 5.09b, like a colossus towering above mere mortals. We therefore believe that shareholders should watch it closely. Ultimately, Fattal Holdings (1998) would likely need a major recapitalization if its creditors demanded repayment. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in isolation; since Fattal Holdings (1998) will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Over 12 months, Fattal Holdings (1998) recorded a loss in EBIT and saw its turnover fall to 1.8 billion euros, a decrease of 53%. To be frank, that doesn’t bode well.
While Fattal Holdings’ (1998) decline in income is about as comforting as a wet hedge, it can be argued that its earnings before interest and taxes (EBIT) are even less attractive. Indeed, it lost 236 million euros at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, the company may change course. However, we would not bet on that given that he has vaporized 271 million in cash over the last twelve months, and that he does not have a lot of liquidity. We therefore consider this to be a high risk stock and we would not be at all surprised if the company is asking shareholders for money before long. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 2 warning signs for Fattal Holdings (1998) (1 shouldn’t be ignored!) Which you should be aware of before investing here.
If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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