Is Total Gabon (EPA:EC) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Total Gabon (EPA:EC) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Total Gabon

What Is Total Gabon's Debt?

You can click the graphic below for the historical numbers, but it shows that Total Gabon had US$8.27m of debt in December 2020, down from US$36.4m, one year before. But on the other hand it also has US$450.1m in cash, leading to a US$441.8m net cash position.

A Look At Total Gabon's Liabilities

Zooming in on the latest balance sheet data, we can see that Total Gabon had liabilities of US$370.6m due within 12 months and liabilities of US$1.67b due beyond that. Offsetting this, it had US$450.1m in cash and US$268.4m in receivables that were due within 12 months. So its liabilities total US$1.32b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$736.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Total Gabon would likely require a major re-capitalisation if it had to pay its creditors today. Given that Total Gabon has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Total Gabon will need earnings to service that debt. 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.

Over 12 months, Total Gabon made a loss at the EBIT level, and saw its revenue drop to US$435m, which is a fall of 46%. That makes us nervous, to say the least.

So How Risky Is Total Gabon?

Although Total Gabon had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$52m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Total Gabon 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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