Is Solegreen (TLV:SLGN) A Risky Investment?

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. We note that Solegreen Ltd (TLV:SLGN) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Solegreen

How Much Debt Does Solegreen Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Solegreen had ₪205.8m of debt, an increase on ₪146.1m, over one year. But on the other hand it also has ₪262.0m in cash, leading to a ₪56.2m net cash position.

How Strong Is Solegreen's Balance Sheet?

We can see from the most recent balance sheet that Solegreen had liabilities of ₪44.0m falling due within a year, and liabilities of ₪284.4m due beyond that. Offsetting these obligations, it had cash of ₪262.0m as well as receivables valued at ₪20.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪46.2m.

Of course, Solegreen has a market capitalization of ₪776.8m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Solegreen boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Solegreen'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.

In the last year Solegreen wasn't profitable at an EBIT level, but managed to grow its revenue by 9.9%, to ₪38m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Solegreen?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Solegreen lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₪93m of cash and made a loss of ₪26m. However, it has net cash of ₪56.2m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Solegreen you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.