Thirdeye Systems (TLV:THES) Takes On Some Risk With Its Use Of Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Thirdeye Systems Ltd (TLV:THES) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Thirdeye Systems

What Is Thirdeye Systems's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Thirdeye Systems had ₪7.06m of debt, an increase on ₪5.34m, over one year. But on the other hand it also has ₪7.10m in cash, leading to a ₪43.0k net cash position.

A Look At Thirdeye Systems' Liabilities

Zooming in on the latest balance sheet data, we can see that Thirdeye Systems had liabilities of ₪17.7m due within 12 months and liabilities of ₪1.87m due beyond that. Offsetting this, it had ₪7.10m in cash and ₪10.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪1.91m.

This state of affairs indicates that Thirdeye Systems' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₪128.7m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Thirdeye Systems boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Thirdeye Systems made a loss at the EBIT level, last year, but improved that to positive EBIT of ₪1.7m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Thirdeye Systems's earnings that will influence how the balance sheet holds up in the future. 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. Thirdeye Systems 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. Over the last year, Thirdeye Systems saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Thirdeye Systems's liabilities, but we can be reassured by the fact it has has net cash of ₪43.0k. So while Thirdeye Systems does not have a great balance sheet, it's certainly not too bad. 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. Be aware that Thirdeye Systems is showing 5 warning signs in our investment analysis , and 2 of those don't sit too well with us...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.