These 4 Measures Indicate That Naphtha Israel Petroleum (TLV:NFTA) Is Using Debt Reasonably Well

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 Naphtha Israel Petroleum Corp. Ltd. (TLV:NFTA) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Naphtha Israel Petroleum

How Much Debt Does Naphtha Israel Petroleum Carry?

The chart below, which you can click on for greater detail, shows that Naphtha Israel Petroleum had ₪1.53b in debt in March 2024; about the same as the year before. However, it also had ₪840.4m in cash, and so its net debt is ₪692.5m.

A Look At Naphtha Israel Petroleum's Liabilities

We can see from the most recent balance sheet that Naphtha Israel Petroleum had liabilities of ₪1.03b falling due within a year, and liabilities of ₪2.03b due beyond that. Offsetting these obligations, it had cash of ₪840.4m as well as receivables valued at ₪562.3m due within 12 months. So it has liabilities totalling ₪1.65b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₪1.99b, so it does suggest shareholders should keep an eye on Naphtha Israel Petroleum's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Naphtha Israel Petroleum's net debt is only 0.59 times its EBITDA. And its EBIT easily covers its interest expense, being 84.2 times the size. So we're pretty relaxed about its super-conservative use of debt. The good news is that Naphtha Israel Petroleum has increased its EBIT by 6.7% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Naphtha Israel Petroleum will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Naphtha Israel Petroleum recorded free cash flow worth a fulsome 84% 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

Naphtha Israel Petroleum's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But truth be told we feel its level of total liabilities does undermine this impression a bit. Looking at all the aforementioned factors together, it strikes us that Naphtha Israel Petroleum can handle its debt fairly comfortably. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. 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 1 warning sign for Naphtha Israel Petroleum you should know about.

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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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.

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