These 4 Measures Indicate That Evertz Technologies (TSE:ET) Is Using Debt Safely

Warren Buffett famously said, '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. We note that Evertz Technologies Limited (TSE:ET) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Evertz Technologies

What Is Evertz Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of July 2022 Evertz Technologies had CA$3.46m of debt, an increase on none, over one year. However, it does have CA$36.7m in cash offsetting this, leading to net cash of CA$33.2m.

A Look At Evertz Technologies' Liabilities

We can see from the most recent balance sheet that Evertz Technologies had liabilities of CA$187.4m falling due within a year, and liabilities of CA$21.5m due beyond that. On the other hand, it had cash of CA$36.7m and CA$110.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$62.2m.

Since publicly traded Evertz Technologies shares are worth a total of CA$1.07b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Evertz Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Evertz Technologies has increased its EBIT by 7.3% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Evertz Technologies can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Evertz Technologies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Evertz Technologies actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Evertz Technologies has CA$33.2m in net cash. And it impressed us with free cash flow of CA$44m, being 104% of its EBIT. So is Evertz Technologies's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Evertz Technologies you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.