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.’ 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. As with many other companies TAT Technologies Ltd. (NASDAQ:TATT) makes use of 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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is TAT Technologies’s Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2021 TAT Technologies had US$12.4m of debt, an increase on none, over one year. However, it does have US$21.7m in cash offsetting this, leading to net cash of US$9.30m.
A Look At TAT Technologies’ Liabilities
According to the last reported balance sheet, TAT Technologies had liabilities of US$22.1m due within 12 months, and liabilities of US$12.0m due beyond 12 months. On the other hand, it had cash of US$21.7m and US$12.9m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
Having regard to TAT Technologies’ size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the US$53.3m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that TAT Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is TAT Technologies’s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it’s definitely worth looking at the earnings trend.
Over 12 months, TAT Technologies made a loss at the EBIT level, and saw its revenue drop to US$69m, which is a fall of 34%. That makes us nervous, to say the least.
So How Risky Is TAT Technologies?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that TAT Technologies had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$8.0m of cash and made a loss of US$3.8m. With only US$9.30m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it.