Dor Alon Energy In Israel (1988) (TLV:DRAL) Has A Somewhat Strained Balance Sheet

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. We can see that Dor Alon Energy In Israel (1988) Ltd (TLV:DRAL) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Dor Alon Energy In Israel (1988)

What Is Dor Alon Energy In Israel (1988)'s Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Dor Alon Energy In Israel (1988) had debt of ₪2.03b, up from ₪1.87b in one year. However, because it has a cash reserve of ₪413.6m, its net debt is less, at about ₪1.61b.

How Strong Is Dor Alon Energy In Israel (1988)'s Balance Sheet?

We can see from the most recent balance sheet that Dor Alon Energy In Israel (1988) had liabilities of ₪1.48b falling due within a year, and liabilities of ₪2.47b due beyond that. On the other hand, it had cash of ₪413.6m and ₪596.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪2.94b.

The deficiency here weighs heavily on the ₪1.28b 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'd watch its balance sheet closely, without a doubt. After all, Dor Alon Energy In Israel (1988) would likely require a major re-capitalisation if it had to pay its creditors today.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Dor Alon Energy In Israel (1988) shareholders face the double whammy of a high net debt to EBITDA ratio (6.8), and fairly weak interest coverage, since EBIT is just 1.5 times the interest expense. The debt burden here is substantial. Another concern for investors might be that Dor Alon Energy In Israel (1988)'s EBIT fell 16% in the last year. If things keep going like that, handling the debt will about as easy as bundling an angry house cat into its travel box. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dor Alon Energy In Israel (1988)'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Dor Alon Energy In Israel (1988) produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

On the face of it, Dor Alon Energy In Israel (1988)'s net debt to EBITDA left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. We're quite clear that we consider Dor Alon Energy In Israel (1988) to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Dor Alon Energy In Israel (1988) has 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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