OMV Petrom (BVB:SNP) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 OMV Petrom S.A. (BVB:SNP) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for OMV Petrom

What Is OMV Petrom's Net Debt?

As you can see below, OMV Petrom had RON258.5m of debt at March 2021, down from RON337.8m a year prior. But on the other hand it also has RON9.09b in cash, leading to a RON8.83b net cash position.

How Healthy Is OMV Petrom's Balance Sheet?

We can see from the most recent balance sheet that OMV Petrom had liabilities of RON5.66b falling due within a year, and liabilities of RON8.58b due beyond that. On the other hand, it had cash of RON9.09b and RON1.46b worth of receivables due within a year. So it has liabilities totalling RON3.69b more than its cash and near-term receivables, combined.

Since publicly traded OMV Petrom shares are worth a total of RON23.6b, it seems unlikely that this level of liabilities would be a major 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, OMV Petrom also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact OMV Petrom's saving grace is its low debt levels, because its EBIT has tanked 80% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if OMV Petrom 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, a company can only pay off debt with cold hard cash, not accounting profits. OMV Petrom 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. During the last three years, OMV Petrom produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although OMV Petrom's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RON8.83b. The cherry on top was that in converted 76% of that EBIT to free cash flow, bringing in RON2.4b. So we don't have any problem with OMV Petrom's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for OMV Petrom that you should be aware of.

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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