Does N.R. Spuntech Industries (TLV:SPNTC) Have A Healthy Balance Sheet?

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 can see that N.R. Spuntech Industries Ltd. (TLV:SPNTC) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for N.R. Spuntech Industries

What Is N.R. Spuntech Industries's Debt?

As you can see below, N.R. Spuntech Industries had ₪223.4m of debt at September 2020, down from ₪240.3m a year prior. However, it does have ₪30.9m in cash offsetting this, leading to net debt of about ₪192.5m.

How Strong Is N.R. Spuntech Industries' Balance Sheet?

According to the last reported balance sheet, N.R. Spuntech Industries had liabilities of ₪179.7m due within 12 months, and liabilities of ₪190.5m due beyond 12 months. On the other hand, it had cash of ₪30.9m and ₪90.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪248.6m.

N.R. Spuntech Industries has a market capitalization of ₪648.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

N.R. Spuntech Industries's net debt to EBITDA ratio of about 1.6 suggests only moderate use of debt. And its strong interest cover of 10.4 times, makes us even more comfortable. On top of that, N.R. Spuntech Industries grew its EBIT by 93% 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 N.R. Spuntech Industries 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. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, N.R. Spuntech Industries 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

Happily, N.R. Spuntech Industries's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. And the good news does not stop there, as its EBIT growth rate also supports that impression! Looking at the bigger picture, we think N.R. Spuntech Industries's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. 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. Be aware that N.R. Spuntech Industries is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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