Is TotalEnergies EP Gabon Société anonyme (EPA:EC) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, TotalEnergies EP Gabon Société anonyme (EPA:EC) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for TotalEnergies EP Gabon Société anonyme

What Is TotalEnergies EP Gabon Société anonyme's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 TotalEnergies EP Gabon Société anonyme had US$32.7m of debt, an increase on US$8.27m, over one year. But it also has US$911.6m in cash to offset that, meaning it has US$878.9m net cash.

How Healthy Is TotalEnergies EP Gabon Société anonyme's Balance Sheet?

According to the last reported balance sheet, TotalEnergies EP Gabon Société anonyme had liabilities of US$228.7m due within 12 months, and liabilities of US$1.42b due beyond 12 months. Offsetting this, it had US$911.6m in cash and US$213.2m in receivables that were due within 12 months. So it has liabilities totalling US$521.8m more than its cash and near-term receivables, combined.

TotalEnergies EP Gabon Société anonyme has a market capitalization of US$917.1m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, TotalEnergies EP Gabon Société anonyme boasts net cash, so it's fair to say it does not have a heavy debt load!

Although TotalEnergies EP Gabon Société anonyme made a loss at the EBIT level, last year, it was also good to see that it generated US$46m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is TotalEnergies EP Gabon Société anonyme'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, a company can only pay off debt with cold hard cash, not accounting profits. TotalEnergies EP Gabon Société anonyme may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, TotalEnergies EP Gabon Société anonyme actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although TotalEnergies EP Gabon Société anonyme's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$878.9m. The cherry on top was that in converted 591% of that EBIT to free cash flow, bringing in US$274m. So we are not troubled with TotalEnergies EP Gabon Société anonyme's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with TotalEnergies EP Gabon Société anonyme .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.