Aran Research & Development (1982) (TLV:ARAN) Has A Rock Solid Balance Sheet

Warren Buffett famously said, '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 can see that Aran Research & Development (1982) Ltd. (TLV:ARAN) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Aran Research & Development (1982)

What Is Aran Research & Development (1982)'s Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Aran Research & Development (1982) had debt of ₪25.5m, up from ₪16.2m in one year. However, its balance sheet shows it holds ₪49.5m in cash, so it actually has ₪24.1m net cash.

How Strong Is Aran Research & Development (1982)'s Balance Sheet?

We can see from the most recent balance sheet that Aran Research & Development (1982) had liabilities of ₪73.6m falling due within a year, and liabilities of ₪19.6m due beyond that. Offsetting this, it had ₪49.5m in cash and ₪36.2m in receivables that were due within 12 months. So its liabilities total ₪7.41m more than the combination of its cash and short-term receivables.

Given Aran Research & Development (1982) has a market capitalization of ₪89.2m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Aran Research & Development (1982) boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Aran Research & Development (1982) grew its EBIT by 671% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Aran Research & Development (1982) 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Aran Research & Development (1982) 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. Happily for any shareholders, Aran Research & Development (1982) actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

We could understand if investors are concerned about Aran Research & Development (1982)'s liabilities, but we can be reassured by the fact it has has net cash of ₪24.1m. The cherry on top was that in converted 116% of that EBIT to free cash flow, bringing in ₪25m. So is Aran Research & Development (1982)'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Aran Research & Development (1982) has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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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