Gaztransport & Technigaz (EPA:GTT) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Gaztransport & Technigaz SA (EPA:GTT) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that GTT is potentially overvalued!

What Is Gaztransport & Technigaz's Net Debt?

The image below, which you can click on for greater detail, shows that Gaztransport & Technigaz had debt of €3.12m at the end of June 2022, a reduction from €3.36m over a year. However, its balance sheet shows it holds €168.2m in cash, so it actually has €165.1m net cash.

How Healthy Is Gaztransport & Technigaz's Balance Sheet?

According to the last reported balance sheet, Gaztransport & Technigaz had liabilities of €138.7m due within 12 months, and liabilities of €17.7m due beyond 12 months. Offsetting this, it had €168.2m in cash and €155.1m in receivables that were due within 12 months. So it actually has €166.9m more liquid assets than total liabilities.

This short term liquidity is a sign that Gaztransport & Technigaz could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Gaztransport & Technigaz boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Gaztransport & Technigaz if management cannot prevent a repeat of the 25% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Gaztransport & Technigaz can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Gaztransport & Technigaz 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. During the last three years, Gaztransport & Technigaz produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Gaztransport & Technigaz has net cash of €165.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in €118m. So we don't have any problem with Gaztransport & Technigaz's use of debt. 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 example, we've discovered 1 warning sign for Gaztransport & Technigaz that you should be aware of before investing here.

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.