Is Electra Consumer Products (1970) (TLV:ECP) A Risky Investment?

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.' 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 Electra Consumer Products (1970) Ltd (TLV:ECP) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Electra Consumer Products (1970)

How Much Debt Does Electra Consumer Products (1970) Carry?

The image below, which you can click on for greater detail, shows that Electra Consumer Products (1970) had debt of ₪8.44m at the end of March 2021, a reduction from ₪318.4m over a year. However, it does have ₪277.9m in cash offsetting this, leading to net cash of ₪269.5m.

How Healthy Is Electra Consumer Products (1970)'s Balance Sheet?

We can see from the most recent balance sheet that Electra Consumer Products (1970) had liabilities of ₪1.36b falling due within a year, and liabilities of ₪215.1m due beyond that. Offsetting this, it had ₪277.9m in cash and ₪580.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪720.1m.

Of course, Electra Consumer Products (1970) has a market capitalization of ₪3.80b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Electra Consumer Products (1970) also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Electra Consumer Products (1970) turned things around in the last 12 months, delivering and EBIT of ₪160m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Electra Consumer Products (1970)'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Electra Consumer Products (1970) 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, Electra Consumer Products (1970) actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although Electra Consumer Products (1970)'s balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₪269.5m. And it impressed us with free cash flow of ₪196m, being 122% of its EBIT. So is Electra Consumer Products (1970)'s debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Electra Consumer Products (1970) has 1 warning sign we think 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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