Is Utron (TLV:UTRN) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Utron Ltd (TLV:UTRN) does use debt in its business. But the real question is whether this debt is making the company risky.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Utron

How Much Debt Does Utron Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Utron had debt of ₪8.45m, up from ₪7.00m in one year. However, it does have ₪45.9m in cash offsetting this, leading to net cash of ₪37.5m.

How Strong Is Utron's Balance Sheet?

According to the last reported balance sheet, Utron had liabilities of ₪41.8m due within 12 months, and liabilities of ₪11.0m due beyond 12 months. Offsetting this, it had ₪45.9m in cash and ₪18.7m in receivables that were due within 12 months. So it actually has ₪11.9m more liquid assets than total liabilities.

This surplus suggests that Utron has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Utron boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Utron 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.

Over 12 months, Utron made a loss at the EBIT level, and saw its revenue drop to ₪43m, which is a fall of 25%. That makes us nervous, to say the least.

So How Risky Is Utron?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Utron had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₪3.1m of cash and made a loss of ₪31m. Given it only has net cash of ₪37.5m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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, we've discovered 3 warning signs for Utron (1 can't be ignored!) that you should be aware of before investing here.

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. 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.
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