Is TAT Technologies (NASDAQ:TATT) Using Debt Sensibly?

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 TAT Technologies Ltd. (NASDAQ:TATT) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for TAT Technologies

What Is TAT Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 TAT Technologies had US$7.97m of debt, an increase on none, over one year. But on the other hand it also has US$24.1m in cash, leading to a US$16.2m net cash position.

How Strong Is TAT Technologies' Balance Sheet?

According to the last reported balance sheet, TAT Technologies had liabilities of US$25.2m due within 12 months, and liabilities of US$10.7m due beyond 12 months. Offsetting these obligations, it had cash of US$24.1m as well as receivables valued at US$11.4m due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that TAT Technologies' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$69.6m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, TAT Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! 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 TAT Technologies will need earnings to service that debt. 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.

In the last year TAT Technologies had a loss before interest and tax, and actually shrunk its revenue by 23%, to US$75m. That makes us nervous, to say the least.

So How Risky Is TAT Technologies?

While TAT Technologies lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$693k. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. To that end, you should learn about the 3 warning signs we've spotted with TAT Technologies (including 1 which is a bit unpleasant) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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