Telsys (TLV:TLSY) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Telsys Ltd. (TLV:TLSY) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Telsys

What Is Telsys's Net Debt?

The chart below, which you can click on for greater detail, shows that Telsys had ₪27.0m in debt in September 2020; about the same as the year before. But on the other hand it also has ₪51.3m in cash, leading to a ₪24.3m net cash position.

How Strong Is Telsys' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Telsys had liabilities of ₪65.6m due within 12 months and liabilities of ₪40.8m due beyond that. Offsetting this, it had ₪51.3m in cash and ₪46.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪8.61m.

Having regard to Telsys' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₪779.3m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Telsys also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Telsys has been able to increase its EBIT by 30% 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 you can't view debt in total isolation; since Telsys 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Telsys 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. Over the last three years, Telsys actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about Telsys's liabilities, but we can be reassured by the fact it has has net cash of ₪24.3m. The cherry on top was that in converted 123% of that EBIT to free cash flow, bringing in ₪94m. So is Telsys's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Telsys has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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