Is Electra Consumer Products (1970) (TLV:ECP) Using Too Much 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Electra Consumer Products (1970) Ltd (TLV:ECP) 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

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

What Is Electra Consumer Products (1970)'s Net Debt?

As you can see below, Electra Consumer Products (1970) had ₪115.2m of debt at September 2020, down from ₪313.4m a year prior. But on the other hand it also has ₪360.8m in cash, leading to a ₪245.6m net cash position.

A Look At Electra Consumer Products (1970)'s Liabilities

We can see from the most recent balance sheet that Electra Consumer Products (1970) had liabilities of ₪1.04b falling due within a year, and liabilities of ₪342.5m due beyond that. Offsetting these obligations, it had cash of ₪360.8m as well as receivables valued at ₪575.6m due within 12 months. So its liabilities total ₪447.1m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Electra Consumer Products (1970) has a market capitalization of ₪2.07b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

Notably, Electra Consumer Products (1970)'s EBIT launched higher than Elon Musk, gaining a whopping 434% on last year. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Electra Consumer Products (1970) 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. 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 three years, 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 ₪245.6m. And it impressed us with free cash flow of ₪225m, being 212% of its EBIT. So is Electra Consumer Products (1970)'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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Electra Consumer Products (1970) , and understanding them should be part of your investment process.

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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