Terminal X Online (TLV:TRX) Takes On Some Risk With Its Use Of Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Terminal X Online Ltd. (TLV:TRX) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.

See our latest analysis for Terminal X Online

What Is Terminal X Online's Debt?

As you can see below, Terminal X Online had ₪70.0m of debt at September 2023, down from ₪90.0m a year prior. However, it does have ₪122.0m in cash offsetting this, leading to net cash of ₪52.0m.

A Look At Terminal X Online's Liabilities

We can see from the most recent balance sheet that Terminal X Online had liabilities of ₪158.4m falling due within a year, and liabilities of ₪157.7m due beyond that. On the other hand, it had cash of ₪122.0m and ₪77.2m worth of receivables due within a year. So it has liabilities totalling ₪116.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Terminal X Online has a market capitalization of ₪376.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Terminal X Online boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Terminal X Online improved its EBIT from a last year's loss to a positive ₪788k. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Terminal X Online 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. Terminal X Online 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. During the last year, Terminal X Online burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While Terminal X Online does have more liabilities than liquid assets, it also has net cash of ₪52.0m. Despite the cash, we do find Terminal X Online's conversion of EBIT to free cash flow concerning, so we're not particularly comfortable with the stock. 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. For instance, we've identified 1 warning sign for Terminal X Online that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.