We Think TotalEnergies EP Gabon Société Anonyme (EPA:EC) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that TotalEnergies EP Gabon Société Anonyme (EPA:EC) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for TotalEnergies EP Gabon Société Anonyme

What Is TotalEnergies EP Gabon Société Anonyme's Debt?

As you can see below, at the end of June 2023, TotalEnergies EP Gabon Société Anonyme had US$29.1m of debt, up from US$22.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$631.3m in cash, so it actually has US$602.3m net cash.

How Strong Is TotalEnergies EP Gabon Société Anonyme's Balance Sheet?

The latest balance sheet data shows that TotalEnergies EP Gabon Société Anonyme had liabilities of US$218.1m due within a year, and liabilities of US$1.14b falling due after that. Offsetting these obligations, it had cash of US$631.3m as well as receivables valued at US$252.5m due within 12 months. So its liabilities total US$473.7m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since TotalEnergies EP Gabon Société Anonyme has a market capitalization of US$820.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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!

On the other hand, TotalEnergies EP Gabon Société Anonyme's EBIT dived 14%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is TotalEnergies EP Gabon Société Anonyme's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last two years, TotalEnergies EP Gabon Société Anonyme actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While TotalEnergies EP Gabon Société Anonyme does have more liabilities than liquid assets, it also has net cash of US$602.3m. And it impressed us with free cash flow of US$77m, being 118% of its EBIT. So we are not troubled with TotalEnergies EP Gabon Société Anonyme's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for TotalEnergies EP Gabon Société Anonyme that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.