We Think Neto Malinda Trading (TLV:NTML) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Neto Malinda Trading Ltd. (TLV:NTML) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Neto Malinda Trading

What Is Neto Malinda Trading's Debt?

You can click the graphic below for the historical numbers, but it shows that Neto Malinda Trading had ₪28.5m of debt in December 2020, down from ₪32.6m, one year before. But it also has ₪82.8m in cash to offset that, meaning it has ₪54.3m net cash.

How Healthy Is Neto Malinda Trading's Balance Sheet?

The latest balance sheet data shows that Neto Malinda Trading had liabilities of ₪361.7m due within a year, and liabilities of ₪24.5m falling due after that. On the other hand, it had cash of ₪82.8m and ₪750.7m worth of receivables due within a year. So it actually has ₪447.4m more liquid assets than total liabilities.

This surplus liquidity suggests that Neto Malinda Trading's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Neto Malinda Trading boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Neto Malinda Trading grew its EBIT by 52% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Neto Malinda Trading 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Neto Malinda Trading 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 most recent three years, Neto Malinda Trading recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Neto Malinda Trading has ₪54.3m in net cash and a decent-looking balance sheet. And we liked the look of last year's 52% year-on-year EBIT growth. When it comes to Neto Malinda Trading's debt, we sufficiently relaxed that our mind turns to the jacuzzi. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Neto Malinda Trading's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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