We Think Gaztransport & Technigaz (EPA:GTT) 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.' 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. Importantly, Gaztransport & Technigaz SA (EPA:GTT) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Gaztransport & Technigaz

How Much Debt Does Gaztransport & Technigaz Carry?

As you can see below, at the end of December 2022, Gaztransport & Technigaz had €4.05m of debt, up from €3.15m a year ago. Click the image for more detail. But on the other hand it also has €212.8m in cash, leading to a €208.8m net cash position.

How Strong Is Gaztransport & Technigaz's Balance Sheet?

According to the last reported balance sheet, Gaztransport & Technigaz had liabilities of €207.5m due within 12 months, and liabilities of €17.1m due beyond 12 months. On the other hand, it had cash of €212.8m and €158.1m worth of receivables due within a year. So it can boast €146.3m 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.

But the other side of the story is that Gaztransport & Technigaz saw its EBIT decline by 7.5% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Gaztransport & Technigaz recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Gaztransport & Technigaz has €208.8m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in €119m. 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. Be aware that Gaztransport & Technigaz is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.