Is SNGN Romgaz (BVB:SNG) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, SNGN Romgaz SA (BVB:SNG) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for SNGN Romgaz

What Is SNGN Romgaz's Debt?

You can click the graphic below for the historical numbers, but it shows that SNGN Romgaz had RON1.21b of debt in September 2023, down from RON1.53b, one year before. However, its balance sheet shows it holds RON2.43b in cash, so it actually has RON1.22b net cash.

How Strong Is SNGN Romgaz's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SNGN Romgaz had liabilities of RON2.59b due within 12 months and liabilities of RON1.66b due beyond that. Offsetting this, it had RON2.43b in cash and RON1.41b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RON400.1m.

Given SNGN Romgaz has a market capitalization of RON19.7b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, SNGN Romgaz also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, SNGN Romgaz grew its EBIT by 60% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SNGN Romgaz can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Over the last three years, SNGN Romgaz recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about SNGN Romgaz's liabilities, but we can be reassured by the fact it has has net cash of RON1.22b. And it impressed us with free cash flow of RON2.9b, being 90% of its EBIT. So we don't think SNGN Romgaz's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that SNGN Romgaz is showing 2 warning signs in our investment analysis , and 1 of those is significant...

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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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.