Does Energix - Renewable Energies (TLV:ENRG) Have A Healthy Balance Sheet?

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 Energix - Renewable Energies Ltd. (TLV:ENRG) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Energix - Renewable Energies

What Is Energix - Renewable Energies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Energix - Renewable Energies had ₪3.67b of debt, an increase on ₪2.44b, over one year. However, it also had ₪750.6m in cash, and so its net debt is ₪2.92b.

How Strong Is Energix - Renewable Energies' Balance Sheet?

We can see from the most recent balance sheet that Energix - Renewable Energies had liabilities of ₪1.10b falling due within a year, and liabilities of ₪4.19b due beyond that. Offsetting these obligations, it had cash of ₪750.6m as well as receivables valued at ₪228.0m due within 12 months. So it has liabilities totalling ₪4.31b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₪6.45b, so it does suggest shareholders should keep an eye on Energix - Renewable Energies' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Strangely Energix - Renewable Energies has a sky high EBITDA ratio of 5.2, implying high debt, but a strong interest coverage of 19.4. So either it has access to very cheap long term debt or that interest expense is going to grow! Pleasingly, Energix - Renewable Energies is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 181% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Energix - Renewable Energies will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Energix - Renewable Energies saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

While Energix - Renewable Energies's conversion of EBIT to free cash flow has us nervous. To wit both its interest cover and EBIT growth rate were encouraging signs. We think that Energix - Renewable Energies's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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 Energix - Renewable Energies has 3 warning signs (and 2 which are significant) we think you should know about.

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.