Ituran Location and Control (NASDAQ:ITRN) Could Easily Take On More Debt
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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Ituran Location and Control Ltd. (NASDAQ:ITRN) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Ituran Location and Control
What Is Ituran Location and Control's Net Debt?
As you can see below, Ituran Location and Control had US$31.4m of debt at December 2021, down from US$54.5m a year prior. But on the other hand it also has US$54.7m in cash, leading to a US$23.3m net cash position.
How Healthy 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$104.6m falling due within a year, and liabilities of US$50.6m due beyond that. Offsetting these obligations, it had cash of US$54.7m as well as receivables valued at US$43.9m due within 12 months. So it has liabilities totalling US$56.6m more than its cash and near-term receivables, combined.
Of course, Ituran Location and Control has a market capitalization of US$472.2m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Ituran Location and Control also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, Ituran Location and Control grew its EBIT by 30% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Ituran Location and Control recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Summing up
While Ituran Location and Control does have more liabilities than liquid assets, it also has net cash of US$23.3m. And it impressed us with free cash flow of US$39m, being 90% of its EBIT. So we don't think Ituran Location and Control's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Ituran Location and Control you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
