Health Check: How Prudently Does Solegreen (TLV:SLGN) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Solegreen Ltd (TLV:SLGN) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Solegreen

What Is Solegreen's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Solegreen had ₪146.1m of debt in September 2020, down from ₪158.4m, one year before. However, it does have ₪168.0m in cash offsetting this, leading to net cash of ₪21.9m.

How Strong Is Solegreen's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Solegreen had liabilities of ₪28.1m due within 12 months and liabilities of ₪226.7m due beyond that. Offsetting these obligations, it had cash of ₪168.0m as well as receivables valued at ₪12.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪74.8m.

Given Solegreen has a market capitalization of ₪516.5m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Solegreen also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Solegreen'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.

In the last year Solegreen wasn't profitable at an EBIT level, but managed to grow its revenue by 81%, to ₪34m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Solegreen?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Solegreen had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₪7.4m and booked a ₪10m accounting loss. But at least it has ₪21.9m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Solegreen may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for Solegreen you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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