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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that SNGN Romgaz SA (BVB:SNG) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for SNGN Romgaz

What Is SNGN Romgaz's Debt?

The image below, which you can click on for greater detail, shows that SNGN Romgaz had debt of RON1.29b at the end of June 2023, a reduction from RON1.61b over a year. However, it does have RON3.37b in cash offsetting this, leading to net cash of RON2.08b.

How Strong Is SNGN Romgaz's Balance Sheet?

We can see from the most recent balance sheet that SNGN Romgaz had liabilities of RON3.51b falling due within a year, and liabilities of RON1.74b due beyond that. Offsetting these obligations, it had cash of RON3.37b as well as receivables valued at RON1.35b due within 12 months. So its liabilities total RON528.3m more than the combination of its cash and short-term receivables.

Given SNGN Romgaz has a market capitalization of RON17.3b, 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. 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 59% over the last twelve months, and that growth will make it easier to handle its debt. 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 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. Over the last three years, SNGN Romgaz recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

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 RON2.08b. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in RON2.9b. So we don't think SNGN Romgaz's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for SNGN Romgaz (of which 1 is significant!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.