OMV Petrom (BVB:SNP) Has A Rock Solid Balance Sheet

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 note that OMV Petrom S.A. (BVB:SNP) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for OMV Petrom

What Is OMV Petrom's Debt?

You can click the graphic below for the historical numbers, but it shows that OMV Petrom had RON271.6m of debt in December 2021, down from RON284.0m, one year before. But on the other hand it also has RON10.3b in cash, leading to a RON10.1b net cash position.

How Strong Is OMV Petrom's Balance Sheet?

According to the last reported balance sheet, OMV Petrom had liabilities of RON8.19b due within 12 months, and liabilities of RON7.56b due beyond 12 months. On the other hand, it had cash of RON10.3b and RON2.64b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RON2.79b.

Since publicly traded OMV Petrom shares are worth a total of RON25.5b, it seems unlikely that this level of liabilities would be a major 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, OMV Petrom also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, OMV Petrom grew its EBIT by 345% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 OMV Petrom 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, OMV Petrom actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While OMV Petrom does have more liabilities than liquid assets, it also has net cash of RON10.1b. And it impressed us with free cash flow of RON4.2b, being 101% of its EBIT. So is OMV Petrom's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for OMV Petrom you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.