We Think Ituran Location and Control (NASDAQ:ITRN) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Ituran Location and Control Ltd. (NASDAQ:ITRN) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ituran Location and Control

What Is Ituran Location and Control's Debt?

You can click the graphic below for the historical numbers, but it shows that Ituran Location and Control had US$52.7m of debt in December 2020, down from US$67.9m, one year before. However, its balance sheet shows it holds US$78.8m in cash, so it actually has US$26.2m net cash.

How Strong Is Ituran Location and Control's Balance Sheet?

We can see from the most recent balance sheet that Ituran Location and Control had liabilities of US$112.7m falling due within a year, and liabilities of US$69.8m due beyond that. Offsetting this, it had US$78.8m in cash and US$39.3m in receivables that were due within 12 months. So its liabilities total US$64.4m more than the combination of its cash and short-term receivables.

Of course, Ituran Location and Control has a market capitalization of US$449.4m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Ituran Location and Control boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Ituran Location and Control has seen its EBIT plunge 14% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 Ituran Location and Control 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Ituran Location and Control 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. During the last three years, Ituran Location and Control generated free cash flow amounting to a very robust 80% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

Although Ituran Location and Control's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$26.2m. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in US$50m. So we don't have any problem with Ituran Location and Control's use of debt. 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. Case in point: We've spotted 3 warning signs for Ituran Location and Control you should be aware of.

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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