Does SNGN Romgaz (BVB:SNG) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies SNGN Romgaz SA (BVB:SNG) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for SNGN Romgaz

What Is SNGN Romgaz's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2023 SNGN Romgaz had debt of RON1.37b, up from none in one year. But it also has RON3.62b in cash to offset that, meaning it has RON2.25b net cash.

How Healthy Is SNGN Romgaz's Balance Sheet?

We can see from the most recent balance sheet that SNGN Romgaz had liabilities of RON3.17b falling due within a year, and liabilities of RON1.66b due beyond that. Offsetting these obligations, it had cash of RON3.62b as well as receivables valued at RON1.55b due within 12 months. So it can boast RON337.3m more liquid assets than total liabilities.

This surplus suggests that SNGN Romgaz has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that SNGN Romgaz has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that SNGN Romgaz has boosted its EBIT by 81%, thus reducing the spectre of future debt repayments. 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 SNGN Romgaz can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While SNGN Romgaz has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, SNGN Romgaz actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case SNGN Romgaz has RON2.25b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in RON4.3b. So is SNGN Romgaz's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with SNGN Romgaz (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.