Tadiran Group (TLV:TDRN) Could Easily Take On More Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Tadiran Group Ltd (TLV:TDRN) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Tadiran Group

What Is Tadiran Group's Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Tadiran Group had debt of ₪140.9m, up from ₪33.7m in one year. But on the other hand it also has ₪248.9m in cash, leading to a ₪108.0m net cash position.

A Look At Tadiran Group's Liabilities

We can see from the most recent balance sheet that Tadiran Group had liabilities of ₪383.0m falling due within a year, and liabilities of ₪154.5m due beyond that. Offsetting this, it had ₪248.9m in cash and ₪268.9m in receivables that were due within 12 months. So its liabilities total ₪19.7m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Tadiran Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₪3.07b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Tadiran Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Tadiran Group grew its EBIT by 62% 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 Tadiran Group 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. Tadiran Group 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, Tadiran Group recorded free cash flow worth 79% 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 look at a company's total liabilities, it is very reassuring that Tadiran Group has ₪108.0m in net cash. And we liked the look of last year's 62% year-on-year EBIT growth. So we don't think Tadiran Group's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Tadiran Group .

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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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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