Is Oil Country Tubular (NSE:OILCOUNTUB) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Oil Country Tubular Limited (NSE:OILCOUNTUB) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Oil Country Tubular

What Is Oil Country Tubular's Net Debt?

As you can see below, at the end of March 2024, Oil Country Tubular had ₹902.4m of debt, up from ₹658.9m a year ago. Click the image for more detail. On the flip side, it has ₹31.5m in cash leading to net debt of about ₹870.9m.

How Strong Is Oil Country Tubular's Balance Sheet?

The latest balance sheet data shows that Oil Country Tubular had liabilities of ₹235.1m due within a year, and liabilities of ₹2.09b falling due after that. Offsetting these obligations, it had cash of ₹31.5m as well as receivables valued at ₹5.76m due within 12 months. So its liabilities total ₹2.28b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₹2.34b, so it does suggest shareholders should keep an eye on Oil Country Tubular's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Oil Country Tubular's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Oil Country Tubular reported revenue of ₹430m, which is a gain of 8,772%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Despite the top line growth, Oil Country Tubular still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₹586m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₹190m of cash over the last year. So suffice it to say we consider the stock very risky. 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 Oil Country Tubular you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.