Is O.Y. Nofar Energy (TLV:NOFR) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies O.Y. Nofar Energy Ltd (TLV:NOFR) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is O.Y. Nofar Energy's Debt?

As you can see below, at the end of September 2024, O.Y. Nofar Energy had ₪3.14b of debt, up from ₪2.22b a year ago. Click the image for more detail. On the flip side, it has ₪621.4m in cash leading to net debt of about ₪2.52b.

How Healthy Is O.Y. Nofar Energy's Balance Sheet?

The latest balance sheet data shows that O.Y. Nofar Energy had liabilities of ₪438.5m due within a year, and liabilities of ₪3.56b falling due after that. Offsetting these obligations, it had cash of ₪621.4m as well as receivables valued at ₪236.6m due within 12 months. So it has liabilities totalling ₪3.14b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's ₪2.92b market capitalization, you might well be inclined to review the balance sheet intently. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is O.Y. Nofar Energy'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.

See our latest analysis for O.Y. Nofar Energy

Over 12 months, O.Y. Nofar Energy made a loss at the EBIT level, and saw its revenue drop to ₪314m, which is a fall of 2.0%. We would much prefer see growth.

Caveat Emptor

Importantly, O.Y. Nofar Energy had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₪28m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of ₪626m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that O.Y. Nofar Energy is showing 1 warning sign in our investment analysis , you should know about...

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.

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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.