Is Tadir-Gan (Precision Products) 1993 (TLV:TDGN-L) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Tadir-Gan (Precision Products) 1993 Ltd. (TLV:TDGN-L) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tadir-Gan (Precision Products) 1993

How Much Debt Does Tadir-Gan (Precision Products) 1993 Carry?

You can click the graphic below for the historical numbers, but it shows that Tadir-Gan (Precision Products) 1993 had US$8.61m of debt in June 2020, down from US$10.5m, one year before. However, it also had US$517.0k in cash, and so its net debt is US$8.10m.

A Look At Tadir-Gan (Precision Products) 1993's Liabilities

Zooming in on the latest balance sheet data, we can see that Tadir-Gan (Precision Products) 1993 had liabilities of US$10.0m due within 12 months and liabilities of US$6.18m due beyond that. Offsetting these obligations, it had cash of US$517.0k as well as receivables valued at US$2.73m due within 12 months. So its liabilities total US$12.9m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$12.4m, we think shareholders really should watch Tadir-Gan (Precision Products) 1993's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tadir-Gan (Precision Products) 1993's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Tadir-Gan (Precision Products) 1993 had a loss before interest and tax, and actually shrunk its revenue by 32%, to US$21m. To be frank that doesn't bode well.

Caveat Emptor

While Tadir-Gan (Precision Products) 1993's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$1.5m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of US$2.6m. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Tadir-Gan (Precision Products) 1993 .

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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