David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Computer Direct Group Ltd. (TLV:CMDR) uses debt. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Computer Direct Group
How much debt does Computer Direct Group have?
You can click on the graph below for historical figures, but it shows that as of September 2021, Computer Direct Group had debt of ₪430.0 million, an increase from ₪224.4 million, on a year. However, since he has a cash reserve of ₪263.5 million, his net debt is lower at around ₪166.4 million.
How strong is Computer Direct Group’s balance sheet?
According to the latest published balance sheet, Computer Direct Group had liabilities of ₪870.2 million due within 12 months and liabilities of ₪465.9 million due beyond 12 months. As compensation for these obligations, it had cash of ₪263.5 million as well as receivables valued at ₪685.3 million due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables by ₪387.2 million.
While that might sound like a lot, it’s not that bad since Computer Direct Group has a market capitalization of ₪1.08 billion, so it could probably bolster its balance sheet by raising capital if needed. However, it is always worth taking a close look at your ability to repay debt.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
Computer Direct Group’s net debt is only 0.68 times its EBITDA. And its EBIT easily covers its interest charges, which is 16.8 times the size. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, Computer Direct Group has grown its EBIT by 44% in the last twelve months, and this growth will make it easier to manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is Computer Direct Group’s earnings that will influence the balance sheet in the future. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Fortunately for all shareholders, Computer Direct Group has actually produced more free cash flow than EBIT for the past three years. There’s nothing better than cash coming in to stay in your lenders’ good books.
Our point of view
Computer Direct Group’s interest coverage suggests he can manage his debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. And the good news does not stop there, since its conversion of EBIT into free cash flow also confirms this impression! Overall, we think Computer Direct Group’s use of debt seems entirely reasonable and we are not concerned about that. Although debt carries risks, when used wisely, it can also generate a higher return on equity. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Computer Direct Group you should know.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.