Does M. Yochananof and Sons (1988) (TLV:YHNF) use too much debt?

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies M. Yochananof and Sons (1988) Ltd (TLV:YHNF) uses debt. But the real question is whether this debt makes the business risky.

What risk does debt carry?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.

Check out our latest analysis for M.Yochananof and Sons (1988)

What is the net debt of M. Yochananof and Sons (1988)?

You can click on the graph below for historical figures, but it shows M. Yochananof and Sons (1988) had ₪58.6 million in debt as of December 2021, up from ₪66.9 million a year earlier. However, his balance sheet shows that he holds ₪465.0 million in cash, so he actually has ₪406.4 million in net cash.

TASE: YHNF Debt to Equity June 6, 2022

How strong is the balance sheet of M. Yochananof and Sons (1988)?

We can see from the most recent balance sheet that Mr. Yochananof and Sons (1988) had liabilities of ₪717.1 million due in one year, and liabilities of ₪1.28 billion due beyond. As compensation for these obligations, it had cash of ₪465.0 million as well as receivables valued at ₪327.1 million due within 12 months. Thus, its liabilities total $1.21 billion more than the combination of its cash and short-term receivables.

This deficit is not that bad as M. Yochananof and Sons (1988) is worth ₪2.84 billion, and therefore could probably raise enough capital to shore up its balance sheet, if the need arose. But it is clear that it is essential to examine closely whether it can manage its debt without dilution. Despite his notable liabilities, Mr. Yochananof and Sons (1988) has a net cash position, so it’s fair to say that he doesn’t have a lot of debt!

We have seen M. Yochananof and Sons (1988) increase its EBIT by 6.4% over the last twelve months. It’s far from amazing, but it’s a good thing when it comes to paying down debt. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine the ability of M. Yochananof and Sons (1988) to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a company can only repay its debts with cold hard cash, not with book profits. Although M. Yochananof and Sons (1988) has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the past three years, M. Yochananof and Sons (1988) free cash flow was 43% of its EBIT, less than expected. This low cash conversion makes debt management more difficult.

Summary

Although Mr. Yochananof and Sons (1988) has more liabilities than liquid assets, he also has a net cash of ₪406.4 million. On top of that, it has increased its EBIT by 6.4% over the last twelve months. We are therefore not concerned with the use of the debt of M. Yochananof and Sons (1988). 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 outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for M. Yochananof and Sons (1988) you should know.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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