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

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies OMV Petrom S.A. (BVB:SNP) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 OMV Petrom

What Is OMV Petrom's Net Debt?

As you can see below, OMV Petrom had RON137.9m of debt at December 2022, down from RON271.6m a year prior. But it also has RON16.6b in cash to offset that, meaning it has RON16.5b net cash.

How Strong Is OMV Petrom's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that OMV Petrom had liabilities of RON8.86b due within 12 months and liabilities of RON8.15b due beyond that. Offsetting these obligations, it had cash of RON16.6b as well as receivables valued at RON3.55b due within 12 months. So it actually has RON3.18b more liquid assets than total liabilities.

This short term liquidity is a sign that OMV Petrom could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, OMV Petrom boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, OMV Petrom grew its EBIT by 219% 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'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 generated free cash flow amounting to a very robust 84% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case OMV Petrom has RON16.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of RON8.1b, being 84% of its EBIT. So is OMV Petrom's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example OMV Petrom has 3 warning signs (and 1 which can't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.