Golan Plastic Products (TLV:GLPL) Has A Pretty Healthy Balance Sheet

Oct 23, 2023

Stock Analysis

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Golan Plastic Products Ltd (TLV:GLPL) does carry debt. But is this debt a concern to shareholders?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Golan Plastic Products

The image below, which you can click on for greater detail, shows that at March 2023 Golan Plastic Products had debt of ₪71.6m, up from ₪38.3m in one year. However, it does have ₪25.7m in cash offsetting this, leading to net debt of about ₪45.9m.

According to the last reported balance sheet, Golan Plastic Products had liabilities of ₪120.7m due within 12 months, and liabilities of ₪100.3m due beyond 12 months. On the other hand, it had cash of ₪25.7m and ₪168.3m worth of receivables due within a year. So its liabilities total ₪27.0m more than the combination of its cash and short-term receivables.

Since publicly traded Golan Plastic Products shares are worth a total of ₪396.7m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Golan Plastic Products's net debt is only 0.79 times its EBITDA. And its EBIT easily covers its interest expense, being 20.9 times the size. So we're pretty relaxed about its super-conservative use of debt. Golan Plastic Products's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Golan Plastic Products's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Golan Plastic Products recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

The good news is that Golan Plastic Products's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And that's just the beginning of the good news since its net debt to EBITDA is also very heartening. All these things considered, it appears that Golan Plastic Products can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Golan Plastic Products has 1 warning sign we think you should be aware of.

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 without delay.

Find out whether Golan Plastic Products is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by 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 to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Golan Plastic Products Ltd develops, produces, distributes, and sells cross-linked polyethylene PEX piping systems in Israel, Europe, Scandinavia, Asia, North America, and South America.

Flawless balance sheet with solid track record.