Unitronics (1989) (RG) (TLV:UNIT) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Unitronics (1989) (R"G) Ltd (TLV:UNIT) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Unitronics (1989) (RG)

What Is Unitronics (1989) (RG)'s Debt?

The image below, which you can click on for greater detail, shows that Unitronics (1989) (RG) had debt of ₪17.4m at the end of December 2020, a reduction from ₪41.7m over a year. However, it does have ₪26.4m in cash offsetting this, leading to net cash of ₪9.00m.

How Strong Is Unitronics (1989) (RG)'s Balance Sheet?

The latest balance sheet data shows that Unitronics (1989) (RG) had liabilities of ₪39.5m due within a year, and liabilities of ₪21.7m falling due after that. Offsetting this, it had ₪26.4m in cash and ₪18.1m in receivables that were due within 12 months. So its liabilities total ₪16.7m more than the combination of its cash and short-term receivables.

Of course, Unitronics (1989) (RG) has a market capitalization of ₪204.8m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Unitronics (1989) (RG) also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Unitronics (1989) (RG) grew its EBIT by 70% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Unitronics (1989) (RG)'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. While Unitronics (1989) (RG) 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. During the last three years, Unitronics (1989) (RG) produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Unitronics (1989) (RG) has ₪9.00m in net cash. And it impressed us with its EBIT growth of 70% over the last year. So is Unitronics (1989) (RG)'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. Be aware that Unitronics (1989) (RG) is showing 2 warning signs in our investment analysis , 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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