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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that Abra Information Technologies Ltd. (TLV:ABRA) does use debt in its business. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Abra Information Technologies

What Is Abra Information Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Abra Information Technologies had ₪16.5m of debt, an increase on ₪1.90m, over one year. But on the other hand it also has ₪65.7m in cash, leading to a ₪49.2m net cash position.

How Healthy Is Abra Information Technologies' Balance Sheet?

We can see from the most recent balance sheet that Abra Information Technologies had liabilities of ₪89.3m falling due within a year, and liabilities of ₪65.5m due beyond that. On the other hand, it had cash of ₪65.7m and ₪65.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪23.9m.

Of course, Abra Information Technologies has a market capitalization of ₪309.0m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Abra Information Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Abra Information Technologies's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Abra Information Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 1,112%, to ₪157m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Abra Information Technologies?

Although Abra Information Technologies had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₪5.7m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. One positive is that Abra Information Technologies is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Abra Information Technologies (of which 1 is significant!) you should know about.

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. 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.