W
arren Buffett's famous quote, "Volatility is far from synonymous with risk," highlights the importance of debt in assessing a company's risk level. Shemen Yielding Real Estate Ltd (TLV:SMNR) uses debt in its business, but should shareholders be concerned? Debt becomes a problem when a company can't easily pay it off or raise capital to cover it. If things get dire, lenders may take control of the business.

    However, debt can also represent cheap capital, especially if it replaces dilution and allows for high returns on investment. When evaluating a company's debt use, we look at cash and debt together. As of September 2024, Shemen Yielding Real Estate had ₪45.5m in debt but also ₪58.4m in cash, resulting in net cash of ₪12.9m.

    Shemen Yielding Real Estate's balance sheet shows liabilities of ₪73.4m due within 12 months and ₪79.4m beyond that. However, it has cash of ₪58.4m and receivables valued at ₪6.43m due within 12 months, offsetting some of these obligations. With a market capitalization of ₪742.1m, these liabilities may not pose a significant threat.

    Despite its noteworthy liabilities, Shemen Yielding Real Estate boasts net cash, indicating it doesn't have a heavy debt load. When analyzing debt levels, the balance sheet is crucial, but earnings will influence how the balance sheet holds up in the future. In the last year, Shemen Yielding Real Estate wasn't profitable at an EBIT level but managed to grow its revenue by 14% to ₪9.6m.

    Although it's loss-making, the company generated positive free cash flow of ₪346k and has net cash on hand. With uninspiring revenue growth, we'd need to see some positive EBIT before getting enthusiastic about this business. The balance sheet is key when analyzing debt, but not all investment risk resides within it. We've discovered 1 warning sign for Shemen Yielding Real Estate that investors should be aware of before investing.