Navitas Petroleum Limited Partnership (TLV:NVPT.L) Has A Somewhat Strained 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.' 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. Importantly, Navitas Petroleum, Limited Partnership (TLV:NVPT.L) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Navitas Petroleum Limited Partnership

What Is Navitas Petroleum Limited Partnership's Net Debt?

As you can see below, at the end of June 2020, Navitas Petroleum Limited Partnership had US$283.8m of debt, up from US$241.2m a year ago. Click the image for more detail. However, because it has a cash reserve of US$96.5m, its net debt is less, at about US$187.3m.

How Healthy Is Navitas Petroleum Limited Partnership's Balance Sheet?

The latest balance sheet data shows that Navitas Petroleum Limited Partnership had liabilities of US$66.5m due within a year, and liabilities of US$238.9m falling due after that. Offsetting this, it had US$96.5m in cash and US$8.95m in receivables that were due within 12 months. So it has liabilities totalling US$199.9m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$221.3m, so it does suggest shareholders should keep an eye on Navitas Petroleum Limited Partnership's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

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.

Weak interest cover of 0.81 times and a disturbingly high net debt to EBITDA ratio of 11.1 hit our confidence in Navitas Petroleum Limited Partnership like a one-two punch to the gut. The debt burden here is substantial. One redeeming factor for Navitas Petroleum Limited Partnership is that it turned last year's EBIT loss into a gain of US$7.6m, over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Navitas Petroleum Limited Partnership will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Navitas Petroleum Limited Partnership saw substantial negative free cash flow, in total. 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, Navitas Petroleum Limited Partnership's interest cover 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 EBIT growth rate is not so bad. We're quite clear that we consider Navitas Petroleum Limited Partnership to be really rather risky, as a result of its balance sheet health. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. 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. Case in point: We've spotted 2 warning signs for Navitas Petroleum Limited Partnership you should be aware of.

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.

When trading Navitas Petroleum Limited Partnership or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.