Ginegar Plastic Products (TLV:GNGR) takes some risk by using debt

Warren Buffett famously said, “Volatility is far from synonymous with risk.” When you think about how risky a particular stock is, it may be obvious that you need to consider debt, because too much debt can sink a company. As with many other companies Ginegar Plastic Products Ltd. (TLV:GNGR) uses debt. But the more important question is: How much risk does this debt pose?

What risk does debt bring with it?

Debt helps a business until the business has difficulty paying it off, whether with new capital or free cash flow. A key component of capitalism is the process of “creative destruction,” in which failed companies are mercilessly liquidated by their bankers. While this isn’t all that common, we often see indebted companies permanently diluting their shareholders because lenders force them to raise capital at a distressed price. Of course, many companies use debt to finance their growth without any negative consequences. When we think about a company’s use of debt, we first consider cash and debt together.

Check out our latest analysis for Ginegar Plastic Products

What is Ginegar Plastic Products’ net debt?

The chart below, which you can click on for further details, shows that Ginegar Plastic Products had ₪202.2m of debt as of September 2024; about the same as the year before. However, this is offset by ₪84.5m in cash leading to net debt of about ₪117.7m.

How good is Ginegar Plastic Products’ balance sheet?

If we take a closer look at the latest balance sheet data, we can see that Ginegar Plastic Products had liabilities of ₪261.2m within 12 months and liabilities of ₪168.9m beyond that. Offsetting this, it had cash of ₪84.5m and receivables worth ₪203.5m due within 12 months. So its liabilities total ₪142.0m more than its cash and short-term receivables combined.

Considering that this deficiency exceeds the company’s market capitalization of ₪138.6m, one might well be inclined to examine the balance sheet closely. Hypothetically, extremely heavy dilution would be required if the company were forced to pay off its debt by raising capital at the current share price.

We measure a company’s debt load relative to its earnings power by dividing its net debt by its earnings before interest, tax, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and tax (EBIT) can cover its interest expense (interest cover). ). We take into account both the absolute amount of the debt and the interest paid on it.

Ginegar Plastic Products’ debt is 2.6 times its EBITDA, and its EBIT covers its interest expense by 4.9 times. Taken together, this means that while we do not want to see debt levels increase, we believe current levels of debt can be managed. We also note that Ginegar Plastic Products improved its EBIT to a positive ₪26m from a loss last year. There is no doubt that the balance sheet is where we learn the most about debt. But it’s Ginegar Plastic Products’ earnings that will influence how its balance sheet performs going forward. So if you’re interested in discovering more about the company’s earnings, it might be worth checking out this graph of its long-term earnings trend.

After all, a company can only pay off its debts with cold hard cash, not accounting profits. Therefore, it is important to consider how much of the earnings before interest and tax (EBIT) is converted into actual free cash flow. Last year, Ginegar Plastic Products barely had any positive free cash flow overall. Even though many companies break even, we prefer to see significant free cash flow, especially if they are already dead.

Our view

At first glance, Ginegar Plastic Products’ total liabilities make us uncertain about the stock, and converting EBIT to free cash flow was no more tempting than the one empty restaurant on the busiest night of the year. But at least the EBIT growth rate isn’t that bad. Looking at the bigger picture, it seems clear to us that Ginegar Plastic Products’ use of debt creates risks for the company. If all goes well, this should increase returns, but on the other hand, debt also increases the risk of permanent loss of capital. There is no doubt that the balance sheet is where we learn the most about debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For this purpose, you should inform yourself about the 4 warning signs We noticed Ginegar Plastic Products (including three that are a bit concerning).

If, after all that, you’re more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks immediately.

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