These 4 Measures Indicate That Electra Consumer Products (1970) (TLV:ECP) Is Using Debt Extensively

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Electra Consumer Products (1970) Ltd (TLV:ECP) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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)

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

As you can see below, at the end of December 2022, Electra Consumer Products (1970) had ₪1.54b of debt, up from ₪998.6m a year ago. Click the image for more detail. However, it does have ₪564.2m in cash offsetting this, leading to net debt of about ₪972.4m.

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

The latest balance sheet data shows that Electra Consumer Products (1970) had liabilities of ₪2.66b due within a year, and liabilities of ₪2.81b falling due after that. On the other hand, it had cash of ₪564.2m and ₪748.8m worth of receivables due within a year. So it has liabilities totalling ₪4.16b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₪2.07b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Electra Consumer Products (1970) would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

While we wouldn't worry about Electra Consumer Products (1970)'s net debt to EBITDA ratio of 3.2, we think its super-low interest cover of 1.9 times is a sign of high leverage. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. Given the debt load, it's hardly ideal that Electra Consumer Products (1970)'s EBIT was pretty flat over the last twelve months. 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 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, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Electra Consumer Products (1970) recorded free cash flow of 47% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

To be frank both Electra Consumer Products (1970)'s interest cover and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. Having said that, its ability to convert EBIT to free cash flow isn't such a worry. We're quite clear that we consider Electra Consumer Products (1970) to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Electra Consumer Products (1970) (of which 1 doesn't sit too well with us!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.