We Think Telsys (TLV:TLSY) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Telsys Ltd. (TLV:TLSY) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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. 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 Telsys

What Is Telsys's 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. However, its balance sheet shows it holds ₪51.3m in cash, so it actually has ₪24.3m net cash.

How Strong Is Telsys's Balance Sheet?

According to the last reported balance sheet, Telsys had liabilities of ₪65.6m due within 12 months, and liabilities of ₪40.8m due beyond 12 months. Offsetting these obligations, it had cash of ₪51.3m as well as receivables valued at ₪46.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪8.61m.

Having regard to Telsys's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₪715.0m 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.

Also positive, Telsys grew its EBIT by 30% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Telsys'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Telsys 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. Happily for any shareholders, Telsys actually produced more free cash flow than EBIT over the last three years. 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 we don't think Telsys's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Telsys you should know about.

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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This article by Simply Wall St is general in nature. 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.
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