We Think OMV Petrom (BVB:SNP) Can Stay On Top Of Its Debt

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.' 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. Importantly, OMV Petrom S.A. (BVB:SNP) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Debt?

The image below, which you can click on for greater detail, shows that OMV Petrom had debt of RON284.0m at the end of December 2020, a reduction from RON330.1m over a year. But it also has RON8.66b in cash to offset that, meaning it has RON8.38b net cash.

A Look At OMV Petrom's Liabilities

Zooming in on the latest balance sheet data, we can see that OMV Petrom had liabilities of RON5.71b due within 12 months and liabilities of RON8.84b due beyond that. Offsetting these obligations, it had cash of RON8.66b as well as receivables valued at RON1.26b due within 12 months. So it has liabilities totalling RON4.63b more than its cash and near-term receivables, combined.

Since publicly traded OMV Petrom shares are worth a total of RON24.8b, 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. Despite its noteworthy liabilities, OMV Petrom boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that OMV Petrom's load is not too heavy, because its EBIT was down 56% over the last year. 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 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 most recent three years, OMV Petrom recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While OMV Petrom does have more liabilities than liquid assets, it also has net cash of RON8.38b. And it impressed us with free cash flow of RON2.1b, being 72% of its EBIT. So we are not troubled with OMV Petrom's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. 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 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. 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.
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