We Think STG International (TLV:STG) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that STG International Ltd. (TLV:STG) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for STG International

How Much Debt Does STG International Carry?

The image below, which you can click on for greater detail, shows that at December 2020 STG International had debt of ₪6.50m, up from none in one year. But it also has ₪9.50m in cash to offset that, meaning it has ₪3.00m net cash.

A Look At STG International's Liabilities

We can see from the most recent balance sheet that STG International had liabilities of ₪32.3m falling due within a year, and liabilities of ₪4.00m due beyond that. Offsetting these obligations, it had cash of ₪9.50m as well as receivables valued at ₪34.4m due within 12 months. So it can boast ₪7.69m more liquid assets than total liabilities.

This surplus suggests that STG International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, STG International boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that STG International has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is STG International'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. STG International 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 three years, STG International 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 it is always sensible to investigate a company's debt, in this case STG International has ₪3.00m in net cash and a decent-looking balance sheet. And we liked the look of last year's 29% year-on-year EBIT growth. So we are not troubled with STG International's debt use. 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. Case in point: We've spotted 2 warning signs for STG International you should be aware of.

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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