Is Doral Group Renewable Energy Resources (TLV:DORL) Using Debt Sensibly?

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. We can see that Doral Group Renewable Energy Resources Ltd (TLV:DORL) does use debt in its business. But should shareholders be worried about its use of debt?

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When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

How Much Debt Does Doral Group Renewable Energy Resources Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Doral Group Renewable Energy Resources had ₪3.32b of debt, an increase on ₪2.03b, over one year. On the flip side, it has ₪486.0m in cash leading to net debt of about ₪2.84b.

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

Zooming in on the latest balance sheet data, we can see that Doral Group Renewable Energy Resources had liabilities of ₪1.17b due within 12 months and liabilities of ₪2.67b due beyond that. Offsetting this, it had ₪486.0m in cash and ₪335.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪3.01b.

Given this deficit is actually higher than the company's market capitalization of ₪2.57b, we think shareholders really should watch Doral Group Renewable Energy Resources's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is Doral Group Renewable Energy Resources's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

View our latest analysis for Doral Group Renewable Energy Resources

In the last year Doral Group Renewable Energy Resources wasn't profitable at an EBIT level, but managed to grow its revenue by 294%, to ₪310m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Even though Doral Group Renewable Energy Resources managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at ₪96m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₪443m in negative free cash flow over the last year. That means it's on the risky side of things. 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. Case in point: We've spotted 2 warning signs for Doral Group Renewable Energy Resources you should be aware of, and 1 of them doesn't sit too well with us.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.