Is Rompetrol Rafinare (BVB:RRC) Using Debt Sensibly?

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 note that Rompetrol Rafinare S.A. (BVB:RRC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Rompetrol Rafinare

What Is Rompetrol Rafinare's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Rompetrol Rafinare had US$310.9m of debt, an increase on US$242.7m, over one year. However, it also had US$57.4m in cash, and so its net debt is US$253.5m.

How Strong Is Rompetrol Rafinare's Balance Sheet?

The latest balance sheet data shows that Rompetrol Rafinare had liabilities of US$1.59b due within a year, and liabilities of US$404.8m falling due after that. Offsetting these obligations, it had cash of US$57.4m as well as receivables valued at US$576.6m due within 12 months. So it has liabilities totalling US$1.36b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$784.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Rompetrol Rafinare would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Rompetrol Rafinare will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Rompetrol Rafinare reported revenue of US$3.0b, which is a gain of 13%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Rompetrol Rafinare had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$22m at the EBIT level. 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. Not least because it had negative free cash flow of US$284m over the last twelve months. That means it's on the risky side of things. 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. To that end, you should learn about the 3 warning signs we've spotted with Rompetrol Rafinare (including 2 which are a bit unpleasant) .

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.