Is Delek Group (TLV:DLEKG) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Delek Group Ltd. (TLV:DLEKG) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Delek Group

What Is Delek Group's Debt?

As you can see below, Delek Group had ₪22.5b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has ₪1.32b in cash leading to net debt of about ₪21.1b.

How Strong Is Delek Group's Balance Sheet?

We can see from the most recent balance sheet that Delek Group had liabilities of ₪11.8b falling due within a year, and liabilities of ₪22.3b due beyond that. Offsetting this, it had ₪1.32b in cash and ₪1.27b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪31.5b.

This deficit casts a shadow over the ₪2.21b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Delek Group would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Delek Group'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. Click here for an interactive snapshot.

In the last year Delek Group wasn't profitable at an EBIT level, but managed to grow its revenue by 196%, to ₪12b. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Even though Delek Group managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping ₪1.7b. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it burned through ₪1.0b in the last year. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. 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. Be aware that Delek Group is showing 4 warning signs in our investment analysis , and 2 of those make us uncomfortable...

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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