Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Rompetrol Rafinare S.A. (BVB:RRC) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Rompetrol Rafinare Carry?
As you can see below, at the end of December 2020, Rompetrol Rafinare had US$322.3m of debt, up from US$292.7m a year ago. Click the image for more detail. However, because it has a cash reserve of US$100.7m, its net debt is less, at about US$221.6m.
How Strong Is Rompetrol Rafinare's Balance Sheet?
The latest balance sheet data shows that Rompetrol Rafinare had liabilities of US$1.37b due within a year, and liabilities of US$425.4m falling due after that. On the other hand, it had cash of US$100.7m and US$549.0m worth of receivables due within a year. So its liabilities total US$1.15b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the US$516.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Rompetrol Rafinare would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Rompetrol Rafinare'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, Rompetrol Rafinare made a loss at the EBIT level, and saw its revenue drop to US$2.3b, which is a fall of 39%. That makes us nervous, to say the least.
Not only did Rompetrol Rafinare's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$130m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of US$220m. And until that time we think this is a risky stock. 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. Be aware that Rompetrol Rafinare is showing 1 warning sign in our investment analysis , 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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