We Think Tiv Taam Holdings 1 (TLV:TTAM) Can Stay On Top Of Its 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 note that Tiv Taam Holdings 1 Ltd. (TLV:TTAM) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tiv Taam Holdings 1

What Is Tiv Taam Holdings 1's Debt?

You can click the graphic below for the historical numbers, but it shows that Tiv Taam Holdings 1 had ₪41.0m of debt in December 2020, down from ₪163.8m, one year before. However, it also had ₪34.5m in cash, and so its net debt is ₪6.52m.

How Healthy Is Tiv Taam Holdings 1's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tiv Taam Holdings 1 had liabilities of ₪360.3m due within 12 months and liabilities of ₪505.3m due beyond that. Offsetting these obligations, it had cash of ₪34.5m as well as receivables valued at ₪103.8m due within 12 months. So its liabilities total ₪727.3m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₪878.3m, so it does suggest shareholders should keep an eye on Tiv Taam Holdings 1's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. But either way, Tiv Taam Holdings 1 has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With net debt at just 0.045 times EBITDA, it seems Tiv Taam Holdings 1 only uses a little bit of leverage. But EBIT was only 5.2 times the interest expense last year, so the borrowing is clearly weighing on the business somewhat. Importantly, Tiv Taam Holdings 1 grew its EBIT by 99% over the last twelve months, and that growth will make it easier to handle its debt. 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 Tiv Taam Holdings 1 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Tiv Taam Holdings 1 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.

Our View

Tiv Taam Holdings 1's conversion of EBIT to free cash flow suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But truth be told we feel its level of total liabilities does undermine this impression a bit. Taking all this data into account, it seems to us that Tiv Taam Holdings 1 takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Tiv Taam Holdings 1 you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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