These 4 Measures Indicate That Tadiran Group (TLV:TDRN) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Tadiran Group Ltd (TLV:TDRN) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Tadiran Group

What Is Tadiran Group's Net Debt?

As you can see below, Tadiran Group had ₪131.0m of debt at September 2021, down from ₪152.7m a year prior. But on the other hand it also has ₪167.6m in cash, leading to a ₪36.6m net cash position.

A Look At Tadiran Group's Liabilities

The latest balance sheet data shows that Tadiran Group had liabilities of ₪435.7m due within a year, and liabilities of ₪135.7m falling due after that. Offsetting these obligations, it had cash of ₪167.6m as well as receivables valued at ₪342.0m due within 12 months. So it has liabilities totalling ₪61.8m more than its cash and near-term receivables, combined.

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 ₪3.68b 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 34% 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 Tadiran Group 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. While Tadiran Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Tadiran Group recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Tadiran Group has ₪36.6m in net cash. And it impressed us with free cash flow of ₪45m, being 82% of its EBIT. So we don't think Tadiran Group's use of debt is risky. 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. Case in point: We've spotted 2 warning signs for Tadiran Group you should be aware of, and 1 of them shouldn't be ignored.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.