We Think Rapac Communication & Infrastructure (TLV:RPAC) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Rapac Communication & Infrastructure Ltd (TLV:RPAC) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, 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.

Check out our latest analysis for Rapac Communication & Infrastructure

What Is Rapac Communication & Infrastructure's Debt?

As you can see below, Rapac Communication & Infrastructure had ₪52.7m of debt at September 2024, down from ₪149.4m a year prior. But it also has ₪100.0m in cash to offset that, meaning it has ₪47.3m net cash.

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

According to the last reported balance sheet, Rapac Communication & Infrastructure had liabilities of ₪342.8m due within 12 months, and liabilities of ₪28.1m due beyond 12 months. Offsetting these obligations, it had cash of ₪100.0m as well as receivables valued at ₪289.6m due within 12 months. So it can boast ₪18.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Rapac Communication & Infrastructure could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Rapac Communication & Infrastructure boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Rapac Communication & Infrastructure grew its EBIT by 136% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Rapac Communication & Infrastructure will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Rapac Communication & Infrastructure 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. 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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Rapac Communication & Infrastructure has net cash of ₪47.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₪69m, being 548% of its EBIT. So is Rapac Communication & Infrastructure's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Rapac Communication & Infrastructure you should be aware of.

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.