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

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.' 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. As with many other companies SNGN Romgaz SA (BVB:SNG) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SNGN Romgaz

What Is SNGN Romgaz's Net Debt?

As you can see below, at the end of September 2022, SNGN Romgaz had RON1.53b of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds RON1.76b in cash, so it actually has RON234.8m net cash.

How Strong Is SNGN Romgaz's Balance Sheet?

According to the last reported balance sheet, SNGN Romgaz had liabilities of RON2.12b due within 12 months, and liabilities of RON1.79b due beyond 12 months. Offsetting this, it had RON1.76b in cash and RON1.19b in receivables that were due within 12 months. So its liabilities total RON963.3m more than the combination of its cash and short-term receivables.

Given SNGN Romgaz has a market capitalization of RON15.4b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, SNGN Romgaz boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that SNGN Romgaz has boosted its EBIT by 97%, thus reducing the spectre of future debt repayments. 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'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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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 RON234.8m. The cherry on top was that in converted 128% of that EBIT to free cash flow, bringing in RON3.6b. 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 1 warning sign with SNGN Romgaz , and understanding them should be part of your investment process.

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.