Doral Group Renewable Energy Resources (TLV:DORL) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Doral Group Renewable Energy Resources Ltd (TLV:DORL) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out the opportunities and risks within the IL Renewable Energy industry.

How Much Debt Does Doral Group Renewable Energy Resources Carry?

The image below, which you can click on for greater detail, shows that at June 2022 Doral Group Renewable Energy Resources had debt of ₪853.1m, up from ₪199.4m in one year. However, it also had ₪587.3m in cash, and so its net debt is ₪265.8m.

How Healthy Is Doral Group Renewable Energy Resources' Balance Sheet?

According to the last reported balance sheet, Doral Group Renewable Energy Resources had liabilities of ₪199.2m due within 12 months, and liabilities of ₪830.0m due beyond 12 months. On the other hand, it had cash of ₪587.3m and ₪41.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪400.8m.

Doral Group Renewable Energy Resources has a market capitalization of ₪1.46b, so it could very likely raise cash to ameliorate 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Doral Group Renewable Energy Resources's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Doral Group Renewable Energy Resources had a loss before interest and tax, and actually shrunk its revenue by 34%, to ₪76m. To be frank that doesn't bode well.

Caveat Emptor

While Doral Group Renewable Energy Resources's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₪48m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₪519m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. We've identified 3 warning signs with Doral Group Renewable Energy Resources (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.