Gilat Telecom Global (TLV:GLTL) Takes On Some Risk With Its Use Of 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.' 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 Gilat Telecom Global Ltd (TLV:GLTL) does use debt in its business. But should shareholders be worried about its use of debt?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Gilat Telecom Global

How Much Debt Does Gilat Telecom Global Carry?

The image below, which you can click on for greater detail, shows that Gilat Telecom Global had debt of US$13.2m at the end of June 2023, a reduction from US$15.1m over a year. However, because it has a cash reserve of US$8.03m, its net debt is less, at about US$5.22m.

How Healthy Is Gilat Telecom Global's Balance Sheet?

According to the last reported balance sheet, Gilat Telecom Global had liabilities of US$24.1m due within 12 months, and liabilities of US$10.1m due beyond 12 months. Offsetting these obligations, it had cash of US$8.03m as well as receivables valued at US$8.84m due within 12 months. So it has liabilities totalling US$17.3m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the US$4.99m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Gilat Telecom Global would likely require a major re-capitalisation if it had to pay its creditors today.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Gilat Telecom Global has a very low debt to EBITDA ratio of 0.88 so it is strange to see weak interest coverage, with last year's EBIT being only 0.47 times the interest expense. So one way or the other, it's clear the debt levels are not trivial. We also note that Gilat Telecom Global improved its EBIT from a last year's loss to a positive US$757k. There's no doubt that we learn most about debt from the balance sheet. But it is Gilat Telecom Global'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Happily for any shareholders, Gilat Telecom Global actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

To be frank both Gilat Telecom Global's interest cover and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Gilat Telecom Global stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Gilat Telecom Global that 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.