We Think Gaztransport & Technigaz (EPA:GTT) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Gaztransport & Technigaz SA (EPA:GTT) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Gaztransport & Technigaz

What Is Gaztransport & Technigaz's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Gaztransport & Technigaz had debt of €4.27m, up from €2.11m in one year. But it also has €141.7m in cash to offset that, meaning it has €137.5m net cash.

How Healthy Is Gaztransport & Technigaz's Balance Sheet?

The latest balance sheet data shows that Gaztransport & Technigaz had liabilities of €100.0m due within a year, and liabilities of €20.5m falling due after that. Offsetting this, it had €141.7m in cash and €145.5m in receivables that were due within 12 months. So it can boast €166.7m 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. Simply put, the fact that Gaztransport & Technigaz has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Gaztransport & Technigaz grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Gaztransport & Technigaz's ability to maintain a healthy balance sheet going forward. 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. 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. Over the most recent three years, Gaztransport & Technigaz recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 €137.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 38% over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Gaztransport & Technigaz (2 are a bit concerning!) that you should be aware of before investing here.

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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