Is Meshek Energy - Renewable Energies (TLV:MSKE) Using Debt Sensibly?

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.' 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, Meshek Energy - Renewable Energies Ltd. (TLV:MSKE) does carry debt. But the real question is whether this debt is making the company risky.

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Meshek Energy - Renewable Energies

What Is Meshek Energy - Renewable Energies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Meshek Energy - Renewable Energies had ₪952.3m of debt, an increase on ₪648.1m, over one year. On the flip side, it has ₪102.9m in cash leading to net debt of about ₪849.4m.

How Healthy Is Meshek Energy - Renewable Energies' Balance Sheet?

We can see from the most recent balance sheet that Meshek Energy - Renewable Energies had liabilities of ₪112.2m falling due within a year, and liabilities of ₪1.09b due beyond that. Offsetting these obligations, it had cash of ₪102.9m as well as receivables valued at ₪28.8m due within 12 months. So its liabilities total ₪1.07b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₪1.29b, so it does suggest shareholders should keep an eye on Meshek Energy - Renewable Energies' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Meshek Energy - 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.

In the last year Meshek Energy - Renewable Energies wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to ₪90m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Meshek Energy - Renewable Energies managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost ₪31m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₪177m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 Meshek Energy - Renewable Energies you should be aware of, and 1 of them doesn't sit too well with us.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.