These 4 Measures Indicate That Motor Oil (Hellas) Corinth Refineries (ATH:MOH) Is Using Debt Reasonably Well

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 is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Motor Oil (Hellas) Corinth Refineries had €2.61b of debt, an increase on €2.01b, over one year. However, it also had €1.26b in cash, and so its net debt is €1.35b.

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

According to the last reported balance sheet, Motor Oil (Hellas) Corinth Refineries had liabilities of €2.06b due within 12 months, and liabilities of €2.78b due beyond 12 months. On the other hand, it had cash of €1.26b and €914.6m worth of receivables due within a year. So it has liabilities totalling €2.67b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of €2.52b, 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. 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.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (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 0.77. And its EBIT easily covers its interest expense, being 25.6 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Even more impressive was the fact that Motor Oil (Hellas) Corinth Refineries grew its EBIT by 217% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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. During the last three years, Motor Oil (Hellas) Corinth Refineries produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Motor Oil (Hellas) Corinth Refineries's interest cover was a real positive on this analysis, as was its EBIT growth rate. Having said that, its level of total liabilities 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. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. 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. Be aware that Motor Oil (Hellas) Corinth Refineries is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.