Does S.N.T.G.N. Transgaz (BVB:TGN) Have A Healthy 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.' 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 S.N.T.G.N. Transgaz S.A. (BVB:TGN) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

Check out our latest analysis for S.N.T.G.N. Transgaz

What Is S.N.T.G.N. Transgaz's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2023 S.N.T.G.N. Transgaz had debt of RON2.13b, up from RON1.77b in one year. However, it also had RON382.0m in cash, and so its net debt is RON1.75b.

How Strong Is S.N.T.G.N. Transgaz's Balance Sheet?

The latest balance sheet data shows that S.N.T.G.N. Transgaz had liabilities of RON797.1m due within a year, and liabilities of RON3.05b falling due after that. Offsetting these obligations, it had cash of RON382.0m as well as receivables valued at RON292.4m due within 12 months. So it has liabilities totalling RON3.17b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of RON3.18b, so it does suggest shareholders should keep an eye on S.N.T.G.N. Transgaz's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if S.N.T.G.N. Transgaz 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.

Over 12 months, S.N.T.G.N. Transgaz reported revenue of RON2.7b, which is a gain of 5.0%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, S.N.T.G.N. Transgaz had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at RON12m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled RON124m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for S.N.T.G.N. Transgaz you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.