Is Abra Information Technologies (TLV:ABRA) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Abra Information Technologies Ltd. (TLV:ABRA) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, 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.

See our latest analysis for Abra Information Technologies

What Is Abra Information Technologies's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Abra Information Technologies had debt of ₪7.74m, up from in one year. However, its balance sheet shows it holds ₪99.1m in cash, so it actually has ₪91.4m net cash.

How Healthy Is Abra Information Technologies' Balance Sheet?

The latest balance sheet data shows that Abra Information Technologies had liabilities of ₪36.8m due within a year, and liabilities of ₪25.9m falling due after that. Offsetting this, it had ₪99.1m in cash and ₪29.0m in receivables that were due within 12 months. So it can boast ₪65.5m more liquid assets than total liabilities.

This surplus liquidity suggests that Abra Information Technologies' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Abra Information Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

Notably, Abra Information Technologies made a loss at the EBIT level, last year, but improved that to positive EBIT of ₪77k in the last twelve months. 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 Abra Information Technologies 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. While Abra Information Technologies 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. Happily for any shareholders, Abra Information Technologies actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Abra Information Technologies has ₪91.4m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 177% of that EBIT to free cash flow, bringing in ₪136k. So we don't think Abra Information Technologies's use of debt is risky. 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. Be aware that Abra Information Technologies is showing 4 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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