Here's Why Gilat Telecom Global (TLV:GLTL) Has A Meaningful Debt Burden

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Gilat Telecom Global

What Is Gilat Telecom Global's Net Debt?

As you can see below, Gilat Telecom Global had US$11.3m of debt at June 2024, down from US$13.2m a year prior. On the flip side, it has US$7.81m in cash leading to net debt of about US$3.44m.

How Healthy Is Gilat Telecom Global's Balance Sheet?

The latest balance sheet data shows that Gilat Telecom Global had liabilities of US$40.0m due within a year, and liabilities of US$6.31m falling due after that. Offsetting this, it had US$7.81m in cash and US$19.4m in receivables that were due within 12 months. So its liabilities total US$19.0m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$11.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Gilat Telecom Global would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Given net debt is only 0.69 times EBITDA, it is initially surprising to see that Gilat Telecom Global's EBIT has low interest coverage of 1.2 times. So while we're not necessarily alarmed we think that its debt is far from trivial. Pleasingly, Gilat Telecom Global is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 314% gain in the last twelve months. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Over the last two years, Gilat Telecom Global 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.

Our View

While Gilat Telecom Global's level of total liabilities has us nervous. For example, its conversion of EBIT to free cash flow and EBIT growth rate give us some confidence in its ability to manage its debt. We think that Gilat Telecom Global's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. 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. To that end, you should be aware of the 3 warning signs we've spotted with Gilat Telecom Global .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.