Would Doral Group Renewable Energy Resources (TLV:DORL) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Doral Group Renewable Energy Resources Ltd (TLV:DORL) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Doral Group Renewable Energy Resources

What Is Doral Group Renewable Energy Resources's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Doral Group Renewable Energy Resources had debt of ₪1.19b, up from ₪830.6m in one year. On the flip side, it has ₪499.3m in cash leading to net debt of about ₪691.7m.

How Strong 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 ₪413.0m due within 12 months and liabilities of ₪1.17b due beyond that. Offsetting these obligations, it had cash of ₪499.3m as well as receivables valued at ₪317.3m due within 12 months. So its liabilities total ₪769.9m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₪1.25b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 51%, to ₪43m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Doral Group Renewable Energy Resources's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₪54m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₪448m of cash over the last year. So suffice it to say we consider the stock very risky. 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, we've discovered 2 warning signs for Doral Group Renewable Energy Resources (1 doesn't sit too well with us!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.