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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. 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. As with many other companies Comtech Telecommunications Corp. (NASDAQ:CMTL) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Comtech Telecommunications
What Is Comtech Telecommunications's Debt?
The chart below, which you can click on for greater detail, shows that Comtech Telecommunications had US$164.6m in debt in July 2019; about the same as the year before. On the flip side, it has US$45.6m in cash leading to net debt of about US$119.0m.
How Strong Is Comtech Telecommunications's Balance Sheet?
According to the last reported balance sheet, Comtech Telecommunications had liabilities of US$145.3m due within 12 months, and liabilities of US$207.3m due beyond 12 months. On the other hand, it had cash of US$45.6m and US$145.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$162.0m.
This deficit isn't so bad because Comtech Telecommunications is worth US$785.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).