Is TotalEnergies EP Gabon Société Anonyme (EPA:EC) Using Too Much Debt?

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 TotalEnergies EP Gabon Société Anonyme (EPA:EC) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at 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 TotalEnergies EP Gabon Société Anonyme had US$1.74m of debt in June 2024, down from US$7.55m, one year before. But it also has US$736.8m in cash to offset that, meaning it has US$735.1m net cash.

A Look At TotalEnergies EP Gabon Société Anonyme's Liabilities

We can see from the most recent balance sheet that TotalEnergies EP Gabon Société Anonyme had liabilities of US$235.9m falling due within a year, and liabilities of US$1.07b due beyond that. On the other hand, it had cash of US$736.8m and US$259.4m worth of receivables due within a year. So its liabilities total US$308.5m more than the combination of its cash and short-term receivables.

TotalEnergies EP Gabon Société Anonyme has a market capitalization of US$877.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, TotalEnergies EP Gabon Société Anonyme also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, TotalEnergies EP Gabon Société Anonyme grew its EBIT by 77% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since TotalEnergies EP Gabon Société Anonyme will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While TotalEnergies EP Gabon Société Anonyme 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. Over the last three years, TotalEnergies EP Gabon Société Anonyme actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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$735.1m. The cherry on top was that in converted 145% of that EBIT to free cash flow, bringing in US$215m. So we don't think TotalEnergies EP Gabon Société Anonyme's use of debt is risky. 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. We've identified 3 warning signs with TotalEnergies EP Gabon Société Anonyme , and understanding them should be part of your investment process.

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.

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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.