We Think Baran Group (TLV:BRAN) Can Stay On Top Of Its Debt

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.' 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 Baran Group Ltd (TLV:BRAN) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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.

Check out our latest analysis for Baran Group

What Is Baran Group's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Baran Group had debt of ₪99.6m, up from ₪68.3m in one year. But it also has ₪100.2m in cash to offset that, meaning it has ₪564.0k net cash.

How Healthy Is Baran Group's Balance Sheet?

We can see from the most recent balance sheet that Baran Group had liabilities of ₪139.4m falling due within a year, and liabilities of ₪88.9m due beyond that. On the other hand, it had cash of ₪100.2m and ₪145.1m worth of receivables due within a year. So it can boast ₪17.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Baran Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Baran Group has more cash than debt is arguably a good indication that it can manage its debt safely.

Importantly, Baran Group grew its EBIT by 67% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Baran Group will need earnings to service that debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Baran Group 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. In the last three years, Baran Group created free cash flow amounting to 9.7% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Baran Group has ₪564.0k in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 67% over the last year. So we don't have any problem with Baran Group's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Baran Group (at least 1 which is concerning) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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