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

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.' 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. We note that Tadiran Holdings Ltd (TLV:TDRN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tadiran Holdings

What Is Tadiran Holdings's Net Debt?

As you can see below, at the end of September 2020, Tadiran Holdings had ₪152.7m of debt, up from ₪50.5m a year ago. Click the image for more detail. But on the other hand it also has ₪296.7m in cash, leading to a ₪144.1m net cash position.

How Strong Is Tadiran Holdings's Balance Sheet?

We can see from the most recent balance sheet that Tadiran Holdings had liabilities of ₪304.3m falling due within a year, and liabilities of ₪157.1m due beyond that. Offsetting these obligations, it had cash of ₪296.7m as well as receivables valued at ₪260.1m due within 12 months. So it actually has ₪95.3m more liquid assets than total liabilities.

This surplus suggests that Tadiran Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Tadiran Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Tadiran Holdings grew its EBIT by 41% 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 Holdings 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 Holdings 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. During the last three years, Tadiran Holdings generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Tadiran Holdings has net cash of ₪144.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in ₪188m. So is Tadiran Holdings's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Tadiran Holdings , and understanding them should be part of your investment process.

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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