Energix - Renewable Energies (TLV:ENRG) Has A Somewhat Strained Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Energix - Renewable Energies Ltd (TLV:ENRG) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Our analysis indicates that ENRG is potentially overvalued!

How Much Debt Does Energix - Renewable Energies Carry?

As you can see below, at the end of June 2022, Energix - Renewable Energies had ₪2.44b of debt, up from ₪1.57b a year ago. Click the image for more detail. However, it also had ₪554.5m in cash, and so its net debt is ₪1.89b.

How Healthy Is Energix - Renewable Energies' Balance Sheet?

We can see from the most recent balance sheet that Energix - Renewable Energies had liabilities of ₪512.0m falling due within a year, and liabilities of ₪3.09b due beyond that. On the other hand, it had cash of ₪554.5m and ₪164.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪2.88b.

This deficit isn't so bad because Energix - Renewable Energies is worth ₪7.06b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With a net debt to EBITDA ratio of 8.0, it's fair to say Energix - Renewable Energies does have a significant amount of debt. However, its interest coverage of 3.3 is reasonably strong, which is a good sign. Looking on the bright side, Energix - Renewable Energies boosted its EBIT by a silky 52% in the last year. Like the milk of human kindness that sort of growth increases resilience, making the company more capable of managing debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Energix - Renewable Energies'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.

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. During the last three years, Energix - Renewable Energies burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Neither Energix - Renewable Energies's ability to convert EBIT to free cash flow nor its net debt to EBITDA gave us confidence in its ability to take on more debt. But its EBIT growth rate tells a very different story, and suggests some resilience. When we consider all the factors discussed, it seems to us that Energix - Renewable Energies is taking some risks with its use of debt. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Energix - Renewable Energies (2 shouldn't be ignored!) that you should be aware of before investing here.

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.