These 4 Measures Indicate That Gaztransport & Technigaz (EPA:GTT) Is Using Debt Safely

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Gaztransport & Technigaz SA (EPA:GTT) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Gaztransport & Technigaz

How Much Debt Does Gaztransport & Technigaz Carry?

As you can see below, Gaztransport & Technigaz had €3.14m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have €253.2m in cash offsetting this, leading to net cash of €250.1m.

How Healthy Is Gaztransport & Technigaz's Balance Sheet?

We can see from the most recent balance sheet that Gaztransport & Technigaz had liabilities of €246.8m falling due within a year, and liabilities of €13.4m due beyond that. Offsetting this, it had €253.2m in cash and €185.3m in receivables that were due within 12 months. So it actually has €178.3m more liquid assets than total liabilities.

This surplus suggests that Gaztransport & Technigaz has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Gaztransport & Technigaz has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that Gaztransport & Technigaz grew its EBIT at 19% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Gaztransport & Technigaz 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. During the last three years, Gaztransport & Technigaz generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Gaztransport & Technigaz has net cash of €250.1m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of €187m, being 87% of its EBIT. So is Gaztransport & Technigaz's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 1 warning sign we've spotted with Gaztransport & Technigaz .

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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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.