Ravad (TLV: RAVD) seems to use a lot of debt
Howard Marks put it right when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk that concerns me … and every investor I practice. know worries ”. So it might be obvious, then, that you need to factor in debt, when you think about how risky a given stock is because too much debt can sink a business. Mostly, Ravad Ltd (TLV: RAVD) is in debt. But should shareholders be worried about its use of debt?
When is debt dangerous?
Debt and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies constantly diluting shareholders because lenders are forcing them to raise capital at a difficult price. Of course, debt can be an important tool in businesses, especially large cap companies. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest analysis for Ravad
What is Ravad’s debt?
As you can see below, Ravad had 311.9 million in debt as of December 2020, which is roughly the same as the year before. You can click on the graph for more details. However, it has € 20.8 million in cash to offset this, leading to net debt of around € 291.1 million.
A look at Ravad’s responsibilities
The latest balance sheet data shows that Ravad had liabilities of 50.2 million due within one year and liabilities of ₪ 313.2 million due thereafter. In return for these obligations, he had cash of ₪ 20.8 million as well as receivables valued at ₪ 10.0 million within 12 months. Thus, its liabilities outweigh the sum of its cash and its (short-term) receivables of 332.6 million euros.
This deficit casts a shadow over the ₪ 204.2 million company, like a colossus towering over mere mortals. We would therefore monitor its record closely, without a doubt. Ultimately, Ravad would likely need a major recapitalization if his creditors demanded repayment.
We use two main ratios to tell us about leverage versus earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt over EBITDA) and the actual interest charges associated with that debt (with its interest coverage ratio).
Ravad shareholders face the double whammy of a high net debt / EBITDA ratio (68.7) and relatively low interest coverage, since EBIT is only 0.53 times interest costs . This means that we consider him to be in heavy debt. Worse yet, Ravad’s EBIT was down 48% from last year. If the profits continue like this for the long haul, it has an incredible chance to pay off that debt. There is no doubt that we learn the most about debt from the balance sheet. But it is Ravad’s profits that will influence the way the balance sheet is kept in the future. So if you want to know more about its earnings, it might be worth checking out this chart of its long term trend.
Finally, while the tax authorities love accounting profits, lenders only accept cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Ravad has burned a lot of money. While this may be the result of spending for growth, it makes debt much riskier.
Our point of view
At first glance, Ravad’s EBIT growth rate left us hesitant about the stock, and his total liability level was no more appealing than the only empty restaurant on the busiest night of the year. . And furthermore, its interest coverage also fails to instill confidence. It seems to us that Ravad carries a heavy burden of balance sheet. If you harvest honey without a bee costume, you might get stung, so we would probably stay away from that particular stock. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 4 warning signs for Ravad (2 don’t sit too well with us!) Which you should be aware of before investing here.
If, after all of this, you’re more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of cash-flow net-growth stocks right now.
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