Rapac Communication & Infrastructure (TLV:RPAC) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Rapac Communication & Infrastructure Ltd (TLV:RPAC) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Rapac Communication & Infrastructure

How Much Debt Does Rapac Communication & Infrastructure Carry?

The image below, which you can click on for greater detail, shows that Rapac Communication & Infrastructure had debt of ₪155.7m at the end of December 2022, a reduction from ₪2.19b over a year. However, it does have ₪123.2m in cash offsetting this, leading to net debt of about ₪32.5m.

How Strong Is Rapac Communication & Infrastructure's Balance Sheet?

According to the last reported balance sheet, Rapac Communication & Infrastructure had liabilities of ₪2.41b due within 12 months, and liabilities of ₪132.0m due beyond 12 months. Offsetting these obligations, it had cash of ₪123.2m as well as receivables valued at ₪243.5m due within 12 months. So it has liabilities totalling ₪2.17b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₪375.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Rapac Communication & Infrastructure would likely require a major re-capitalisation if it had to pay its creditors today.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Rapac Communication & Infrastructure has a low net debt to EBITDA ratio of only 0.22. And its EBIT easily covers its interest expense, being 73.7 times the size. So we're pretty relaxed about its super-conservative use of debt. Also positive, Rapac Communication & Infrastructure grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Rapac Communication & Infrastructure'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. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, Rapac Communication & Infrastructure actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Based on what we've seen Rapac Communication & Infrastructure is not finding it easy, given its level of total liabilities, but the other factors we considered give us cause to be optimistic. In particular, we are dazzled with its interest cover. Considering this range of data points, we think Rapac Communication & Infrastructure is in a good position to manage its debt levels. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. To that end, you should be aware of the 1 warning sign we've spotted with Rapac Communication & Infrastructure .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.