Is Gilat Telecom Global (TLV:GLTL) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Gilat Telecom Global Ltd (TLV:GLTL) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Gilat Telecom Global

How Much Debt Does Gilat Telecom Global Carry?

As you can see below, at the end of December 2021, Gilat Telecom Global had US$20.7m of debt, up from US$13.5m a year ago. Click the image for more detail. But on the other hand it also has US$21.2m in cash, leading to a US$515.0k net cash position.

A Look At Gilat Telecom Global's Liabilities

According to the last reported balance sheet, Gilat Telecom Global had liabilities of US$25.6m due within 12 months, and liabilities of US$20.9m due beyond 12 months. On the other hand, it had cash of US$21.2m and US$6.44m worth of receivables due within a year. So its liabilities total US$18.8m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$6.69m 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 definitely think shareholders need to watch this one closely. At the end of the day, Gilat Telecom Global would probably need a major re-capitalization if its creditors were to demand repayment. Gilat Telecom Global boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Gilat Telecom Global had a loss before interest and tax, and actually shrunk its revenue by 5.0%, to US$52m. We would much prefer see growth.

So How Risky Is Gilat Telecom Global?

While Gilat Telecom Global lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$12m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Gilat Telecom Global (including 2 which don't sit too well with us) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.