Stock Analysis

Is Motor Oil (Hellas) Corinth Refineries (ATH:MOH) A Risky Investment?

ATSE:MOH
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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Motor Oil (Hellas) Corinth Refineries S.A. (ATH:MOH) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Motor Oil (Hellas) Corinth Refineries

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

The chart below, which you can click on for greater detail, shows that Motor Oil (Hellas) Corinth Refineries had €1.97b in debt in September 2022; about the same as the year before. On the flip side, it has €722.4m in cash leading to net debt of about €1.25b.

debt-equity-history-analysis
ATSE:MOH Debt to Equity History March 22nd 2023

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

The latest balance sheet data shows that Motor Oil (Hellas) Corinth Refineries had liabilities of €2.26b due within a year, and liabilities of €2.00b falling due after that. Offsetting these obligations, it had cash of €722.4m as well as receivables valued at €1.95b due within 12 months. So it has liabilities totalling €1.59b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €2.42b. 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.

Motor Oil (Hellas) Corinth Refineries's net debt is only 0.87 times its EBITDA. And its EBIT covers its interest expense a whopping 21.9 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Better yet, Motor Oil (Hellas) Corinth Refineries grew its EBIT by 302% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. Over the last two years, Motor Oil (Hellas) Corinth Refineries reported free cash flow worth 13% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

Both Motor Oil (Hellas) Corinth Refineries's ability to to cover its interest expense with its EBIT and its EBIT growth rate gave us comfort that it can handle its debt. Having said that, its conversion of EBIT to free cash flow somewhat sensitizes us to potential future risks to the balance sheet. Considering this range of data points, we think Motor Oil (Hellas) Corinth Refineries is in a good position to manage its debt levels. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. Be aware that Motor Oil (Hellas) Corinth Refineries is showing 4 warning signs in our investment analysis , and 2 of those are potentially serious...

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.

Valuation is complex, but we're helping make it simple.

Find out whether Motor Oil (Hellas) Corinth Refineries is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.