These 4 Measures Indicate That Top Ramdor Systems & Computers (1990) (TLV:TOPS) Is Using Debt Safely

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.' 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. We can see that Top Ramdor Systems & Computers Co. (1990) Ltd (TLV:TOPS) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Top Ramdor Systems & Computers (1990)

What Is Top Ramdor Systems & Computers (1990)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Top Ramdor Systems & Computers (1990) had ₪24.3m of debt, an increase on ₪16.0m, over one year. However, it does have ₪15.2m in cash offsetting this, leading to net debt of about ₪9.07m.

How Healthy Is Top Ramdor Systems & Computers (1990)'s Balance Sheet?

The latest balance sheet data shows that Top Ramdor Systems & Computers (1990) had liabilities of ₪55.4m due within a year, and liabilities of ₪25.2m falling due after that. Offsetting this, it had ₪15.2m in cash and ₪47.7m in receivables that were due within 12 months. So it has liabilities totalling ₪17.6m more than its cash and near-term receivables, combined.

Since publicly traded Top Ramdor Systems & Computers (1990) shares are worth a total of ₪106.2m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Top Ramdor Systems & Computers (1990)'s net debt is only 0.72 times its EBITDA. And its EBIT easily covers its interest expense, being 10.4 times the size. So we're pretty relaxed about its super-conservative use of debt. In addition to that, we're happy to report that Top Ramdor Systems & Computers (1990) has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Top Ramdor Systems & Computers (1990)'s earnings that will influence how the balance sheet holds up in the future. 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. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Top Ramdor Systems & Computers (1990) recorded free cash flow worth a fulsome 100% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

Top Ramdor Systems & Computers (1990)'s conversion of EBIT to free cash flow suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. Overall, we don't think Top Ramdor Systems & Computers (1990) is taking any bad risks, as its debt load seems modest. So the balance sheet looks pretty healthy, to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Top Ramdor Systems & Computers (1990) that you should be aware of before investing here.

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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