Stock Analysis

Is Isramco Negev 2 Limited Partnership (TLV:ISRA) A Risky Investment?

TASE:ISRA
Source: Shutterstock

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. As with many other companies Isramco Negev 2 Limited Partnership (TLV:ISRA) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Isramco Negev 2 Limited Partnership

What Is Isramco Negev 2 Limited Partnership's Net Debt?

As you can see below, Isramco Negev 2 Limited Partnership had US$443.5m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$187.0m in cash offsetting this, leading to net debt of about US$256.5m.

debt-equity-history-analysis
TASE:ISRA Debt to Equity History December 10th 2023

How Strong Is Isramco Negev 2 Limited Partnership's Balance Sheet?

We can see from the most recent balance sheet that Isramco Negev 2 Limited Partnership had liabilities of US$200.7m falling due within a year, and liabilities of US$557.5m due beyond that. On the other hand, it had cash of US$187.0m and US$67.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$504.0m.

This deficit isn't so bad because Isramco Negev 2 Limited Partnership is worth US$1.06b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With net debt sitting at just 1.0 times EBITDA, Isramco Negev 2 Limited Partnership is arguably pretty conservatively geared. And this view is supported by the solid interest coverage, with EBIT coming in at 8.5 times the interest expense over the last year. But the other side of the story is that Isramco Negev 2 Limited Partnership saw its EBIT decline by 6.0% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Isramco Negev 2 Limited Partnership will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Isramco Negev 2 Limited Partnership recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Our View

On our analysis Isramco Negev 2 Limited Partnership's conversion of EBIT to free cash flow should signal that it won't have too much trouble with its debt. But the other factors we noted above weren't so encouraging. For instance it seems like it has to struggle a bit to grow its EBIT. When we consider all the elements mentioned above, it seems to us that Isramco Negev 2 Limited Partnership is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Isramco Negev 2 Limited Partnership (of which 1 is a bit unpleasant!) you should know about.

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.