Is Petro Welt Technologies (ETR:O2C) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Petro Welt Technologies AG (ETR:O2C) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Petro Welt Technologies

How Much Debt Does Petro Welt Technologies Carry?

The chart below, which you can click on for greater detail, shows that Petro Welt Technologies had €119.8m in debt in March 2020; about the same as the year before. However, its balance sheet shows it holds €120.1m in cash, so it actually has €271.0k net cash.

How Strong Is Petro Welt Technologies's Balance Sheet?

We can see from the most recent balance sheet that Petro Welt Technologies had liabilities of €65.2m falling due within a year, and liabilities of €124.8m due beyond that. Offsetting these obligations, it had cash of €120.1m as well as receivables valued at €71.4m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Petro Welt Technologies's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €102.6m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Petro Welt Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Petro Welt Technologies grew its EBIT by 157% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Petro Welt Technologies'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Petro Welt Technologies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Petro Welt Technologies recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Petro Welt Technologies has net cash of €271.0k, as well as more liquid assets than liabilities. And we liked the look of last year's 157% year-on-year EBIT growth. So is Petro Welt Technologies's debt a risk? It doesn't seem so to us. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Petro Welt Technologies (of which 1 is a bit concerning!) 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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This article by Simply Wall St is general in nature. 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.
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