Is Oil Refineries (TLV:ORL) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Oil Refineries Ltd. (TLV:ORL) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Oil Refineries

What Is Oil Refineries's Net Debt?

The image below, which you can click on for greater detail, shows that Oil Refineries had debt of US$1.43b at the end of September 2020, a reduction from US$1.61b over a year. However, it does have US$637.2m in cash offsetting this, leading to net debt of about US$796.8m.

A Look At Oil Refineries' Liabilities

According to the last reported balance sheet, Oil Refineries had liabilities of US$1.07b due within 12 months, and liabilities of US$1.59b due beyond 12 months. On the other hand, it had cash of US$637.2m and US$476.9m worth of receivables due within a year. So its liabilities total US$1.54b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$667.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Oil Refineries 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 Oil Refineries'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.

In the last year Oil Refineries had a loss before interest and tax, and actually shrunk its revenue by 30%, to US$4.7b. That makes us nervous, to say the least.

Caveat Emptor

While Oil Refineries's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$153m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of US$206m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Oil Refineries has 3 warning signs (and 1 which can't be ignored) we think 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. 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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