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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Ginegar Plastic Products Ltd. (TLV:GNGR) does have debt on its balance sheet. But is this debt a concern to shareholders?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
You can click the graphic below for the historical numbers, but it shows that Ginegar Plastic Products had ₪215.8m of debt in June 2023, down from ₪236.9m, one year before. However, it does have ₪129.8m in cash offsetting this, leading to net debt of about ₪86.0m.
Zooming in on the latest balance sheet data, we can see that Ginegar Plastic Products had liabilities of ₪242.3m due within 12 months and liabilities of ₪209.9m due beyond that. On the other hand, it had cash of ₪129.8m and ₪163.1m worth of receivables due within a year. So its liabilities total ₪159.3m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the ₪94.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Ginegar Plastic Products would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ginegar Plastic Products will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Ginegar Plastic Products made a loss at the EBIT level, and saw its revenue drop to ₪574m, which is a fall of 12%. We would much prefer see growth.
While Ginegar Plastic Products's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₪19m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of ₪38m. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Ginegar Plastic Products (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.