Motor Oil (Hellas) Corinth Refineries (ATH:MOH) Has A Somewhat Strained Balance Sheet

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

When Is Debt Dangerous?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

How Much Debt Does Motor Oil (Hellas) Corinth Refineries Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Motor Oil (Hellas) Corinth Refineries had debt of €2.52b, up from €2.18b in one year. However, it also had €1.17b in cash, and so its net debt is €1.35b.

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 €1.95b due within a year, and liabilities of €2.85b falling due after that. Offsetting this, it had €1.17b in cash and €815.7m in receivables that were due within 12 months. So it has liabilities totalling €2.82b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of €2.38b, 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.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). 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 has a low net debt to EBITDA ratio of only 1.0. And its EBIT covers its interest expense a whopping 16.5 times over. So we're pretty relaxed about its super-conservative use of debt. Also good is that Motor Oil (Hellas) Corinth Refineries grew its EBIT at 15% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, Motor Oil (Hellas) Corinth Refineries recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Neither Motor Oil (Hellas) Corinth Refineries's ability to handle its total liabilities nor its conversion of EBIT to free cash flow gave us confidence in its ability to take on more debt. But the good news is it seems to be able to cover its interest expense with its EBIT with ease. Looking at all the angles mentioned above, it does seem to us that Motor Oil (Hellas) Corinth Refineries is a somewhat risky investment as a result of its debt. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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 example Motor Oil (Hellas) Corinth Refineries has 4 warning signs (and 1 which is potentially serious) we think you should know about.

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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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.