El-Mor Electric Installation & Services (1986) (TLV:ELMR) Seems To Use Debt Quite Sensibly

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. As with many other companies El-Mor Electric Installation & Services (1986) Ltd. (TLV:ELMR) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 El-Mor Electric Installation & Services (1986)

How Much Debt Does El-Mor Electric Installation & Services (1986) Carry?

As you can see below, at the end of September 2020, El-Mor Electric Installation & Services (1986) had ₪25.6m of debt, up from ₪474.0k a year ago. Click the image for more detail. But it also has ₪47.8m in cash to offset that, meaning it has ₪22.2m net cash.

How Strong Is El-Mor Electric Installation & Services (1986)'s Balance Sheet?

We can see from the most recent balance sheet that El-Mor Electric Installation & Services (1986) had liabilities of ₪170.0m falling due within a year, and liabilities of ₪25.1m due beyond that. Offsetting these obligations, it had cash of ₪47.8m as well as receivables valued at ₪181.9m due within 12 months. So it can boast ₪34.6m more liquid assets than total liabilities.

It's good to see that El-Mor Electric Installation & Services (1986) has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, El-Mor Electric Installation & Services (1986) boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that El-Mor Electric Installation & Services (1986) has seen its EBIT plunge 18% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is El-Mor Electric Installation & Services (1986)'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. El-Mor Electric Installation & Services (1986) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, El-Mor Electric Installation & Services (1986) produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that El-Mor Electric Installation & Services (1986) has net cash of ₪22.2m, as well as more liquid assets than liabilities. So we are not troubled with El-Mor Electric Installation & Services (1986)'s debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for El-Mor Electric Installation & Services (1986) you should be aware of, and 1 of them shouldn't be ignored.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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