Does Motor Oil (Hellas) Corinth Refineries (ATH:MOH) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Motor Oil (Hellas) Corinth Refineries S.A. (ATH:MOH) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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 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 Motor Oil (Hellas) Corinth Refineries

What Is Motor Oil (Hellas) Corinth Refineries's Net Debt?

As you can see below, at the end of September 2020, Motor Oil (Hellas) Corinth Refineries had €1.42b of debt, up from €915.8m a year ago. Click the image for more detail. However, because it has a cash reserve of €641.1m, its net debt is less, at about €781.5m.

How Healthy Is Motor Oil (Hellas) Corinth Refineries' Balance Sheet?

We can see from the most recent balance sheet that Motor Oil (Hellas) Corinth Refineries had liabilities of €1.50b falling due within a year, and liabilities of €1.43b due beyond that. Offsetting this, it had €641.1m in cash and €515.2m in receivables that were due within 12 months. So it has liabilities totalling €1.78b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's €1.27b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 Motor Oil (Hellas) Corinth Refineries 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.

In the last year Motor Oil (Hellas) Corinth Refineries had a loss before interest and tax, and actually shrunk its revenue by 29%, to €6.8b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Motor Oil (Hellas) Corinth Refineries's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost €37m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through €321m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. For example, we've discovered 3 warning signs for Motor Oil (Hellas) Corinth Refineries (1 is concerning!) that you should be aware of before investing here.

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.

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