Yahoo Finance We Think Evertz Technologies (TSE:ET) Can Manage Its Debt With Ease
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Evertz Technologies Limited (TSE:ET) does use debt in its business. But should shareholders be worried about its use of debt?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Evertz Technologies
What Is Evertz Technologies's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of April 2022 Evertz Technologies had CA$3.42m of debt, an increase on none, over one year. However, its balance sheet shows it holds CA$33.9m in cash, so it actually has CA$30.5m net cash.
A Look At Evertz Technologies' Liabilities
The latest balance sheet data shows that Evertz Technologies had liabilities of CA$164.6m due within a year, and liabilities of CA$22.8m falling due after that. On the other hand, it had cash of CA$33.9m and CA$106.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$47.0m.
Since publicly traded Evertz Technologies shares are worth a total of CA$997.8m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Evertz Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Evertz Technologies has boosted its EBIT by 30%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Evertz Technologies can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Evertz Technologies 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 last three years, Evertz Technologies recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
Summing up
While it is always sensible to look at a company's total liabilities, it is very reassuring that Evertz Technologies has CA$30.5m in net cash. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in CA$63m. So is Evertz Technologies'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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Evertz Technologies you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
