Stock Analysis
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. We can see that TotalEnergies SE (EPA:TTE) does use debt in its business. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 examine debt levels, we first consider both cash and debt levels, together.
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What Is TotalEnergies's Debt?
The chart below, which you can click on for greater detail, shows that TotalEnergies had US$51.8b in debt in September 2024; about the same as the year before. However, it also had US$31.8b in cash, and so its net debt is US$19.9b.
How Healthy Is TotalEnergies' Balance Sheet?
We can see from the most recent balance sheet that TotalEnergies had liabilities of US$85.7b falling due within a year, and liabilities of US$79.7b due beyond that. Offsetting these obligations, it had cash of US$31.8b as well as receivables valued at US$18.8b due within 12 months. So its liabilities total US$114.8b more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its very significant market capitalization of US$123.0b, so it does suggest shareholders should keep an eye on TotalEnergies' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
TotalEnergies's net debt is only 0.53 times its EBITDA. And its EBIT covers its interest expense a whopping 35.6 times over. So we're pretty relaxed about its super-conservative use of debt. It is just as well that TotalEnergies's load is not too heavy, because its EBIT was down 37% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 TotalEnergies 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. So we always check how much of that EBIT is translated into free cash flow. During the last three years, TotalEnergies produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Our View
TotalEnergies's EBIT growth rate and level of total liabilities definitely weigh on it, in our esteem. But its interest cover tells a very different story, and suggests some resilience. When we consider all the factors discussed, it seems to us that TotalEnergies is taking some risks with its use of debt. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that TotalEnergies is showing 2 warning signs in our investment analysis , and 1 of those is concerning...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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About ENXTPA:TTE
TotalEnergies
A multi-energy company, produces and markets oil and biofuels, natural gas, green gases, renewables, and electricity in France, rest of Europe, North America, Africa, and internationally.