These 4 measures indicate that Rani Zim Shopping Centers (TLV:RANI) uses debt on a large scale

The external fund manager, backed by Charlie Munger of Berkshire Hathaway, Li Lu, makes no bones about it when he says, “The biggest investment risk is not price volatility, but whether you will suffer permanent capital losses.” It seems the smart money knows that debt – which usually accompanies bankruptcies – is a very important factor when assessing how risky a company is. important, Rani Zim Shopping Centers Ltd (TLV:RANI) does bear debt. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Debt is a tool to help companies grow, but if a company is unable to pay off its lenders, it is at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still expensive) situation is that a company has to dilute shareholders at a cheap share price to get its debt under control. The advantage of debt, of course, is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at a high return. When we examine debt levels, we first look at both cash and debt levels together.
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Check out our latest analysis for Rani Zim Malls

What is the fault of Rani Zim Shopping Centers?

As you can see below, Rani Zim Shopping Centers had a debt of ₪906.4 million at the end of March 2021, compared to ₪455.5 million years ago. Click on the image for more details. However, because it has a cash reserve of 69.8 million, its net debt is less, at approximately ₪836.6 million.

debt-equity-history-analysis
TASE: RANI Debt to Equity History August 27, 2021

How strong is the balance sheet of Rani Zim Shopping Centers?

From the most recent balance sheet, we can see that Rani Zim Shopping Centers had liabilities of 148.9 million due within one year, and liabilities of ₪875.9 million thereafter. This was offset by ₪ 69.8 million in cash and ₪ 15.1 million in receivables due within 12 months. So his liabilities outweigh 939.8 million against the sum of his cash and (current) receivables.

Since this shortfall actually exceeds the company’s market cap of ₪732.0 million, we think shareholders should really look at Rani Zim Shopping Centers’ indebtedness, like a parent seeing their child ride a bicycle for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely that shareholders will experience extensive dilution.

We use two main ratios to inform us of debt levels relative to income. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times earnings before interest and taxes (EBIT) will cover interest costs (or interest coverage for short). So we consider debt in relation to earnings, both with and without depreciation and amortization costs.

Shareholders of Rani Zim Shopping Centers are facing the double blow of a high net debt to EBITDA ratio (31.4) and quite weak interest coverage as EBIT is only 1.4 times the interest expense. This means we consider it highly indebted. On the bright side, Rani Zim Shopping Centers increased its EBIT by a silky 66% over the past year. Like a mother’s loving embrace of a newborn, such growth builds resilience, putting the company in a stronger position to manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is the revenues of Rani Zim Shopping Centers that will influence the balance sheet in the future. So if you want to know more about the earnings, it might be worth checking out this graph of the long-term profit trend.

Finally, while the tax man loves accounting profits, lenders only accept cold hard cash. So we need to see clearly whether that EBIT leads to a corresponding free cash flow. Over the last three years, Rani Zim Shopping Centers generated solid free cash flow equal to 70% of its EBIT, roughly what we would expect. This cold hard money means it can reduce its debt whenever it wants to.

Our view

Rani Zim Shopping Centers’ net debt to EBITDA and interest coverage certainly weighs heavily on us. But the good news is that it seems to be able to grow its EBIT with ease. Considering all the factors discussed, it seems to us that Rani Zim Shopping Centers is taking some risks with the use of debt. So while that leverage increases return on equity, we wouldn’t really want to see it increase from now on. When analyzing debt levels, the balance sheet is the obvious place to start. But in the end, any business can contain risks that exist off-balance sheet. These risks can be difficult to spot. Every company has them and we’ve seen them 3 warning signs for Rani Zim Shopping Centers (of which 1 is a bit off-putting!) you should know.

If you are interested in investing in companies that can make profits without debt, check this out free list of growing companies with net cash on the balance sheet.

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This article from 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 as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or your financial situation. We strive to provide you with long-term focused analysis powered by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no position in said stocks.
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