Stock Analysis

We Think Woodside Petroleum (ASX:WPL) Has A Fair Chunk Of Debt

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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Woodside Petroleum Ltd (ASX:WPL) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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. 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.

Check out our latest analysis for Woodside Petroleum

What Is Woodside Petroleum's Net Debt?

As you can see below, at the end of June 2020, Woodside Petroleum had US$6.24b of debt, up from US$5.52b a year ago. Click the image for more detail. On the flip side, it has US$4.54b in cash leading to net debt of about US$1.70b.

ASX:WPL Debt to Equity History November 18th 2020

A Look At Woodside Petroleum's Liabilities

Zooming in on the latest balance sheet data, we can see that Woodside Petroleum had liabilities of US$1.89b due within 12 months and liabilities of US$9.85b due beyond that. On the other hand, it had cash of US$4.54b and US$261.0m worth of receivables due within a year. So its liabilities total US$6.94b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Woodside Petroleum has a huge market capitalization of US$14.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Woodside Petroleum can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Woodside Petroleum had a loss before interest and tax, and actually shrunk its revenue by 12%, to US$4.5b. We would much prefer see growth.

Caveat Emptor

While Woodside Petroleum's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$5.0b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$4.1b into a profit. So in short it's a really risky stock. 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 Woodside Petroleum is showing 4 warning signs in our investment analysis , 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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