Is Hellenic Petroleum (ATH:ELPE) Weighed On By Its Debt Load?

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.' 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 Hellenic Petroleum S.A. (ATH:ELPE) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hellenic Petroleum

What Is Hellenic Petroleum's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Hellenic Petroleum had €2.88b of debt, an increase on €2.63b, over one year. However, because it has a cash reserve of €1.20b, its net debt is less, at about €1.67b.

A Look At Hellenic Petroleum's Liabilities

We can see from the most recent balance sheet that Hellenic Petroleum had liabilities of €2.33b falling due within a year, and liabilities of €2.60b due beyond that. Offsetting these obligations, it had cash of €1.20b as well as receivables valued at €485.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €3.24b.

The deficiency here weighs heavily on the €1.77b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Hellenic Petroleum would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hellenic Petroleum 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.

Over 12 months, Hellenic Petroleum made a loss at the EBIT level, and saw its revenue drop to €5.8b, which is a fall of 35%. That makes us nervous, to say the least.

Caveat Emptor

While Hellenic Petroleum's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping €471m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of €396m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Hellenic Petroleum that you should be aware of.

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. 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.
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