Eltek (NASDAQ:ELTK) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Eltek Ltd. (NASDAQ:ELTK) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Eltek

How Much Debt Does Eltek Carry?

The image below, which you can click on for greater detail, shows that Eltek had debt of US$1.85m at the end of March 2023, a reduction from US$4.41m over a year. However, its balance sheet shows it holds US$8.06m in cash, so it actually has US$6.21m net cash.

How Strong Is Eltek's Balance Sheet?

The latest balance sheet data shows that Eltek had liabilities of US$11.0m due within a year, and liabilities of US$8.14m falling due after that. Offsetting this, it had US$8.06m in cash and US$10.4m in receivables that were due within 12 months. So it has liabilities totalling US$623.0k more than its cash and near-term receivables, combined.

This state of affairs indicates that Eltek's 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$57.2m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Eltek boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Eltek grew its EBIT by 59% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Eltek can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Eltek may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Eltek recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Eltek's liabilities, but we can be reassured by the fact it has has net cash of US$6.21m. And it impressed us with its EBIT growth of 59% over the last year. So we don't think Eltek's use of debt is risky. 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. Case in point: We've spotted 4 warning signs for Eltek you should be aware of.

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.