Elspec: Is the cash-flow improvement real or mostly inventory timing

The main article dealt with the wider 2025 picture. This follow-up isolates cash quality only: how much of the improvement reflects a business that truly throws off more cash, and how much reflects inventory, collections and timing. The answer is not binary. The improvement is real, because operating cash flow rose to ILS 13.441 million from ILS 9.556 million, liquid resources rose to ILS 23.848 million, and the company ended the year with positive working capital and a 4.39 current ratio. But this is still not a clean read. The working-capital help came mainly from inventory, the company itself still describes a deliberately long inventory policy, and another ILS 3.682 million went out in 2025 through capitalized development and lease payments that do not sit inside CFO.

To avoid mixing recurring cash generation with financing flexibility, this follow-up uses an all-in cash-flexibility bridge. In other words, how much cash was left after actual cash uses, reported CAPEX, capitalized development, lease payments and bank-debt repayment. The filing does not disclose maintenance CAPEX, so there is no normalized or maintenance bridge here presented as fact. Put simply, the question is not whether Elspec generated cash in 2025. It did. The question is how much of that improvement is clean enough to repeat without help from inventory timing.

What Actually Built 2025 Operating Cash Flow

The fastest way to read 2025 is through the three layers that built CFO. Net income was ILS 6.291 million. Non-cash adjustments added ILS 4.884 million. Working capital added another ILS 2.266 million. So this was not a year in which cash flow jumped because accounting profit surged. Quite the opposite. Net income fell sharply versus 2024, and the gap was closed through non-cash add-backs and through working capital.

The more important point is what sits inside the working-capital layer. The biggest cash release came from inventory, ILS 3.252 million, and receivables, ILS 1.632 million. Against that, the company actually lost supplier financing, with a ILS 1.924 million decline in payables and another ILS 445 thousand decline in accruals, deferred income and current taxes payable. In other words, suppliers did not fund the cash-flow improvement. They moved in the opposite direction.

That matters because this is not the classic picture of a clean improvement in cash quality. If cash quality were improving through stronger profit, cleaner margins or structurally better conversion, the story would be less dependent on an inventory release. Here inventory is still the center of gravity. It did not just help the number. It was the single biggest contributor inside the working-capital layer.

Why Inventory Still Does Not Give A Clean Read

The problem is not that inventory fell. It did, from ILS 41.686 million to ILS 38.096 million. The problem is that the filing itself does not describe a lighter inventory model. It describes the opposite.

In raw materials, the company says inventory is held against expected backlog, sales forecasts and supply lead times, and that some system components are manufactured even without a specific order already in hand. More than that, it states that on average it holds system-component inventory sufficient for about nine months. That is not an operational accident. It is stated policy.

The filing adds a second layer, even sharper. To deal with shortages and long supply lead times, the company adopted a policy of placing future purchase orders in larger quantities so that inventory would last longer than in the past. So even after the 2025 inventory release, management is not describing a business that has structurally become lighter in working capital. It is describing an operating safety buffer that remains part of the model.

Finished goods tell a similar story. During 2025, because of the war, the company increased inventory of specific measurement-system models, split storage across Caesarea, Beit Shean, Portugal and the US, and said it intends to continue that policy into 2026. This is the critical point. If inventory had fallen together with an explicit shift in policy, one could argue for a structural shortening of the cash cycle. Here the same filing that shows inventory went down also says the company intends to keep a cautious and in some places longer inventory posture.

The proportion is stark as well. Even after the decline, inventory still stands at ILS 38.096 million, against ILS 17.501 million of cash and cash equivalents and ILS 23.848 million of total liquid resources including short-term investments. That does not mean 2025 cash improvement was fake. It does mean that one year of inventory release does not yet prove that the cash cycle has become shorter.

So the right reading is more careful. 2025 benefited from an inventory release, but that release sits on top of an operating model that still deliberately carries long inventory for availability, supply security and geopolitical reasons. In that setting, part of the benefit looks more like timing between purchasing, production and shipment than like a clean move to a lighter working-capital architecture.

Operating Cash Flow Looks Better Than The Cash Left

This is where the difference between operating cash flow and cash actually left over becomes important. In 2025 operating cash flow was ILS 13.441 million. But in the same year the company also spent ILS 3.318 million on fixed assets, capitalized ILS 1.829 million of development costs, paid ILS 1.853 million of lease cash and repaid ILS 312 thousand of bank debt. After all that, about ILS 6.129 million remained.

That point cuts both ways. On the one hand, it disproves the extreme reading that 2025 was only an inventory trick. Even after CAPEX, capitalized development, leases and debt repayment, the company remained positive. That is real progress versus 2024, when the same pre-dividend bridge left only ILS 2.101 million. On the other hand, it also disproves the overly optimistic reading that all ILS 13.4 million of CFO were truly free cash.

Two items matter especially because they sit below the CFO line but are central to cash quality. The first is capitalized development, ILS 1.829 million. This is not a current expense inside operating cash flow. It is a cash use pushed into investing. The second is lease cash, ILS 1.853 million, pushed into financing. Together they absorb ILS 3.682 million, about 27% of reported CFO. So anyone reading only operating cash flow gets a more generous picture than the one that remains after actual cash uses.

The lease note also makes clear that this is not just a 2025 issue. Lease cash payments were ILS 1.853 million, and future lease obligations still total ILS 5.719 million, of which ILS 1.723 million fall within the first year. In other words, leases are not accounting noise. They are a recurring cash call.

At the same time, it is important not to slide into the wrong conclusion. This is not an immediate funding squeeze. The company sits on ILS 23.848 million of liquid resources, a 4.39 current ratio, and only ILS 1.066 million of remaining bank debt. Put differently, Elspec’s cash question today is about quality and repeatability, not survival.

What Has To Happen In 2026 To Call This A Real Quality Improvement

The first checkpoint is that the company should be able to keep CFO positive even without another material inventory release like the one seen in 2025. If the inventory model is intentionally long, it is not sensible to build an ongoing thesis on yearly inventory releases.

The second checkpoint is that capitalized development should start to show up as product sales and gross profit, not only as another layer of cash pushed below CFO. As long as the company continues to capitalize meaningful amounts, the market will need to test whether those amounts really come back through revenue.

The third checkpoint is that the unusual measurement-product inventory built because of the war should stop growing, or preferably start normalizing, rather than coexist with a stronger cash-conversion story.

The fourth checkpoint is that lease cash should not keep consuming a similar share of operating cash flow. In 2025 lease payments alone represented almost 14% of reported CFO. That is not dramatic at the balance-sheet level, but it is very material when judging how much cash is actually left.

Bottom Line

Anyone presenting 2025 as proof that Elspec has fully solved the cash question is going too far. Anyone presenting it as nothing more than an inventory exercise is also missing the point. The more accurate read sits in the middle.

Elspec did generate more cash in 2025, and it even remained positive after CAPEX, capitalized development, leases and debt repayment. But the quality of that improvement is still not closed. The biggest help inside working capital came from inventory, while inventory policy itself remains deliberately long and cautious. At the same time, a meaningful share of cash still leaks into layers below CFO.

So the real 2026 test is not simply whether the company reports another positive CFO number. The test is whether it can do so without another major inventory release, with capitalized development starting to justify itself through sales, and with a cash profile that still looks strong after lease payments. Until then, the cash-flow improvement looks real, but not yet clean.