Here’s why BIG malls (TLV: BIG) have significant 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. Mostly, BIG Shopping Centers Ltd. (TLV:BIG) is in debt. But the real question is whether this debt makes the business risky.

When is debt a problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.

Check out our latest analysis for BIG malls

How much debt do BIG malls have?

The image below, which you can click on for more details, shows that in September 2021, BIG malls had a debt of ₪16.1 billion, up from ₪7.50 billion in one year. However, he also had ₪1.27 billion in cash, so his net debt is ₪14.8 billion.

TASE: BIG Debt to Equity History February 21, 2022

A look at the liabilities of large shopping centers

Zooming in on the latest balance sheet data, we can see that BIG malls had liabilities of ₪2.83 billion due within 12 months and liabilities of ₪15.5 billion due beyond. As compensation for these obligations, it had cash of ₪1.27 billion as well as receivables valued at ₪409.1 million due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by ₪16.6 billion.

The deficiency here weighs heavily on the firm ₪10.4b itself, like a child struggling under the weight of a huge backpack full of books, his sports gear and a trumpet. So we definitely think shareholders need to watch this one closely. After all, BIG Shopping Centers would likely need a major recapitalization if it were to pay its creditors today.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

BIG Shopping Centers shareholders face the double whammy of a high net debt to EBITDA ratio (16.6) and quite low interest coverage, as EBIT is only 1.9 times the interest charge. This means that we would consider him to be heavily indebted. The silver lining is that BIG Shopping Centers increased its EBIT by 154% last year, which feeds like youthful idealism. If this earnings trend continues, it will make its leverage much more manageable in the future. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of BIG Shopping Centers that will influence the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.

Finally, a company can only repay its debts with cold hard cash, not with book profits. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, BIG Shopping Centers has produced strong free cash flow equivalent to 51% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.

Our point of view

To be frank, BIG Shopping Centers’ level of total liabilities and track record of managing its debt, based on its EBITDA, makes us rather uncomfortable with its level of leverage. But at least it’s decent enough to increase its EBIT; it’s encouraging. Overall, we think it’s fair to say that BIG Shopping Centers is sufficiently leveraged that there are real risks around the balance sheet. If all goes well, it can pay off, but the downside of this debt is a greater risk of permanent losses. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. To do this, you need to find out about the 5 warning signs we have spotted LARGE Shopping Centers (including 2 must-sees).

If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

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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John A. Bogar