Is Motor Oil (Hellas) Corinth Refineries (ATH:MOH) Using Too Much Debt?

Warren Buffett famously said, '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, Motor Oil (Hellas) Corinth Refineries S.A. (ATH:MOH) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 examine debt levels, we first consider both cash and debt levels, together.

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

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

As you can see below, at the end of June 2021, Motor Oil (Hellas) Corinth Refineries had €1.91b of debt, up from €1.42b a year ago. Click the image for more detail. However, it also had €599.6m in cash, and so its net debt is €1.31b.

How Strong 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 €1.64b falling due within a year, and liabilities of €1.65b due beyond that. On the other hand, it had cash of €599.6m and €611.8m worth of receivables due within a year. So its liabilities total €2.08b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of €1.60b, we think shareholders really should watch Motor Oil (Hellas) Corinth Refineries's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Motor Oil (Hellas) Corinth Refineries has a debt to EBITDA ratio of 3.5 and its EBIT covered its interest expense 5.1 times. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. Notably, Motor Oil (Hellas) Corinth Refineries made a loss at the EBIT level, last year, but improved that to positive EBIT of €260m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Motor Oil (Hellas) Corinth Refineries's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. During the last year, Motor Oil (Hellas) Corinth Refineries burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

On the face of it, Motor Oil (Hellas) Corinth Refineries's level of total liabilities left us tentative about the stock, and its conversion of EBIT to free cash flow was no more enticing than the one empty restaurant on the busiest night of the year. But at least its interest cover is not so bad. We're quite clear that we consider Motor Oil (Hellas) Corinth Refineries to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Motor Oil (Hellas) Corinth Refineries (1 is a bit concerning!) that you should be aware of before investing here.

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.

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.

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