Is SNGN Romgaz (BVB:SNG) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that SNGN Romgaz SA (BVB:SNG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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

How Much Debt Does SNGN Romgaz Carry?

The image below, which you can click on for greater detail, shows that at June 2022 SNGN Romgaz had debt of RON1.61b, up from none in one year. However, it does have RON7.16b in cash offsetting this, leading to net cash of RON5.56b.

How Healthy Is SNGN Romgaz's Balance Sheet?

The latest balance sheet data shows that SNGN Romgaz had liabilities of RON3.71b due within a year, and liabilities of RON1.88b falling due after that. Offsetting this, it had RON7.16b in cash and RON2.09b in receivables that were due within 12 months. So it can boast RON3.66b more liquid assets than total liabilities.

This surplus suggests that SNGN Romgaz is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that SNGN Romgaz has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that SNGN Romgaz grew its EBIT by 108% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. 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, a company can only pay off debt with cold hard cash, not accounting profits. SNGN Romgaz may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, SNGN Romgaz actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case SNGN Romgaz has RON5.56b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 129% of that EBIT to free cash flow, bringing in RON3.6b. The bottom line is that we do not find SNGN Romgaz's debt levels at all concerning. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for SNGN Romgaz you should know about.

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.