These 4 Measures Indicate That Gilat Satellite Networks (NASDAQ:GILT) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Gilat Satellite Networks Ltd. (NASDAQ:GILT) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Gilat Satellite Networks

What Is Gilat Satellite Networks's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Gilat Satellite Networks had US$6.71m of debt, an increase on none, over one year. But on the other hand it also has US$104.1m in cash, leading to a US$97.3m net cash position.

How Strong Is Gilat Satellite Networks' Balance Sheet?

According to the last reported balance sheet, Gilat Satellite Networks had liabilities of US$121.9m due within 12 months, and liabilities of US$23.4m due beyond 12 months. Offsetting these obligations, it had cash of US$104.1m as well as receivables valued at US$76.2m due within 12 months. So it can boast US$35.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Gilat Satellite Networks could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Gilat Satellite Networks boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Gilat Satellite Networks grew its EBIT by 43% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Gilat Satellite Networks 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. While Gilat Satellite Networks has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Gilat Satellite Networks recorded free cash flow worth 67% 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

While it is always sensible to investigate a company's debt, in this case Gilat Satellite Networks has US$97.3m in net cash and a decent-looking balance sheet. And we liked the look of last year's 43% year-on-year EBIT growth. So is Gilat Satellite Networks's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Gilat Satellite Networks you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com