Raval ACS (TLV: RVL) has a fairly healthy track record

David Iben put it right when he said: “Volatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. So it seems like smart money knows that debt – which is usually linked to bankruptcies – is a very important factor, when you assess the risk level of a business. We can see that Raval ACS Ltd. (TLV: RVL) uses debt in his business. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a business cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting shareholders because lenders are forcing them to raise capital at a difficult price. Of course, many companies use debt to finance growth without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

Check out our latest review for Raval ACS

What is Raval ACS’s net debt?

As you can see below, Raval ACS had 91.7 million euros in debt in September 2020, up from 105.4 million euros the year before. On the other hand, it has € 41.3 million in cash, leading to a net debt of around € 50.4 million.

TASE: History of debt versus equity of RVL March 11, 2021

How healthy is Raval ACS’s track record?

According to the last published balance sheet, Raval ACS had liabilities of € 99.9 million less than 12 months and liabilities of € 58.1 million over 12 months. In return for these obligations, he has cash of € 41.3 million as well as receivables valued at € 50.3 million within 12 months. Thus, its liabilities amount to € 66.3 million more than the combination of its cash and short-term receivables.

This deficit is not that serious because Raval ACS is worth € 182.4m, and could therefore probably raise enough capital to consolidate its balance sheet, if the need arises. But it is clear that we absolutely need to take a close look at whether it can manage its debt without dilution.

We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) cover his interests. costs (interest coverage). Thus, we consider debt versus earnings with and without amortization charges.

Raval ACS has a low net debt to EBITDA ratio of just 1.4. And its EBIT covers its interest costs 22.3 times more. So we’re pretty relaxed about its extremely conservative use of debt. It is also interesting to note that Raval ACS has increased its EBIT by 19% over the past year, thereby increasing its capacity to manage debt. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at the debt in total isolation; since Raval ACS will need revenue to service this debt. So if you want to know more about his earnings, it might be worth checking out this graph of the evolution of its long-term profits.

Finally, a business can only pay off its debts with cash, not book profits. We therefore always check the part of this EBIT which translates into free cash flow. Over the past three years, Raval ACS has posted free cash flow of 20% of its EBIT, which is really pretty low. For us, the cash conversion that arouses a bit of paranoia is the ability to extinguish debt.

Our point of view

Based on our analysis, Raval ACS’s interest coverage should indicate that it will not have too many problems with its debt. However, our other observations were not so encouraging. For example, its conversion from EBIT to free cash flow makes us a little nervous about its debt. Given this range of data points, we believe Raval ACS is well positioned to manage its debt levels. But a caveat: We believe debt levels are high enough to warrant continued monitoring. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 1 warning sign for Raval ACS which you should be aware of before investing here.

If you want to invest in companies that can generate profits without the burden of debt, take a look at this free list of growing companies that have net cash on the balance sheet.

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