Stock Analysis

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

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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for OMV Petrom

How Much Debt Does OMV Petrom Carry?

You can click the graphic below for the historical numbers, but it shows that OMV Petrom had RON253.1m of debt in June 2022, down from RON301.5m, one year before. However, it does have RON13.2b in cash offsetting this, leading to net cash of RON13.0b.

BVB:SNP Debt to Equity History September 13th 2022

How Strong Is OMV Petrom's Balance Sheet?

We can see from the most recent balance sheet that OMV Petrom had liabilities of RON11.3b falling due within a year, and liabilities of RON7.00b due beyond that. Offsetting these obligations, it had cash of RON13.2b as well as receivables valued at RON3.21b due within 12 months. So it has liabilities totalling RON1.89b more than its cash and near-term receivables, combined.

Of course, OMV Petrom has a market capitalization of RON25.8b, so these liabilities are probably manageable. 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 423% last year, which is an impressive improvement. 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 it is future earnings, more than anything, that will determine OMV Petrom's ability to maintain a healthy balance sheet going forward. 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 OMV Petrom 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. During the last three years, OMV Petrom generated free cash flow amounting to a very robust 97% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that OMV Petrom has RON13.0b in net cash. And it impressed us with free cash flow of RON7.9b, being 97% of its EBIT. So we don't think OMV Petrom's use of debt is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with OMV Petrom (including 1 which shouldn't be ignored) .

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.

Valuation is complex, but we're helping make it simple.

Find out whether OMV Petrom is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.