Orad (TLV:ORAD) Is Carrying A Fair Bit Of 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.' 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 Orad Ltd (TLV:ORAD) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Orad

What Is Orad's Net Debt?

The image below, which you can click on for greater detail, shows that Orad had debt of ₪52.1m at the end of March 2021, a reduction from ₪66.2m over a year. However, because it has a cash reserve of ₪14.0m, its net debt is less, at about ₪38.1m.

A Look At Orad's Liabilities

We can see from the most recent balance sheet that Orad had liabilities of ₪94.4m falling due within a year, and liabilities of ₪25.8m due beyond that. Offsetting this, it had ₪14.0m in cash and ₪79.7m in receivables that were due within 12 months. So its liabilities total ₪26.6m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Orad is worth ₪55.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Orad'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.

Over 12 months, Orad made a loss at the EBIT level, and saw its revenue drop to ₪149m, which is a fall of 6.1%. We would much prefer see growth.

Caveat Emptor

Importantly, Orad had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₪2.8m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of ₪13m into a profit. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Orad (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.

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