Is Electra Power (2019) (TLV:ELCP) A Risky Investment?

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.' 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. We note that Electra Power (2019) Ltd (TLV:ELCP) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Electra Power (2019)

What Is Electra Power (2019)'s Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Electra Power (2019) had debt of ₪706.4m, up from ₪638.1m in one year. However, because it has a cash reserve of ₪29.0m, its net debt is less, at about ₪677.4m.

How Healthy Is Electra Power (2019)'s Balance Sheet?

According to the last reported balance sheet, Electra Power (2019) had liabilities of ₪374.3m due within 12 months, and liabilities of ₪661.6m due beyond 12 months. Offsetting these obligations, it had cash of ₪29.0m as well as receivables valued at ₪265.2m due within 12 months. So it has liabilities totalling ₪741.7m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₪342.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Electra Power (2019) would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Electra Power (2019)'s earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Electra Power (2019) made a loss at the EBIT level, and saw its revenue drop to ₪703m, which is a fall of 4.3%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Electra Power (2019) produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₪6.1m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of ₪66m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. For instance, we've identified 4 warning signs for Electra Power (2019) (2 are significant) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com