Is Gilat Telecom Global (TLV:GLTL) Weighed On By Its Debt Load?

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.' 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 Gilat Telecom Global Ltd (TLV:GLTL) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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 Gilat Telecom Global

How Much Debt Does Gilat Telecom Global Carry?

As you can see below, at the end of March 2022, Gilat Telecom Global had US$19.7m of debt, up from US$11.3m a year ago. Click the image for more detail. However, it also had US$18.9m in cash, and so its net debt is US$788.0k.

How Healthy Is Gilat Telecom Global's Balance Sheet?

According to the last reported balance sheet, Gilat Telecom Global had liabilities of US$27.5m due within 12 months, and liabilities of US$18.4m due beyond 12 months. Offsetting these obligations, it had cash of US$18.9m as well as receivables valued at US$8.80m due within 12 months. So its liabilities total US$18.2m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$6.17m company, like a colossus towering over mere mortals. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Gilat Telecom Global will need earnings to service that debt. 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 7.8%, to US$49m. That's not what we would hope to see.

Caveat Emptor

Importantly, Gilat Telecom Global had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$3.3m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost US$6.1m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Gilat Telecom Global you should be aware of.

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.