We Think S.N.T.G.N. Transgaz (BVB:TGN) Can Stay On Top Of Its Debt

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 the real question is whether this debt is making the company risky.

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

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

The image below, which you can click on for greater detail, shows that at March 2025 S.N.T.G.N. Transgaz had debt of RON3.44b, up from RON2.43b in one year. On the flip side, it has RON964.8m in cash leading to net debt of about RON2.47b.

How Healthy 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 RON1.46b due within a year, and liabilities of RON4.44b falling due after that. Offsetting this, it had RON964.8m in cash and RON461.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RON4.47b.

While this might seem like a lot, it is not so bad since S.N.T.G.N. Transgaz has a market capitalization of RON7.58b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

View our latest analysis for S.N.T.G.N. Transgaz

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

We'd say that S.N.T.G.N. Transgaz's moderate net debt to EBITDA ratio ( being 2.1), indicates prudence when it comes to debt. And its commanding EBIT of 1k times its interest expense, implies the debt load is as light as a peacock feather. Pleasingly, S.N.T.G.N. Transgaz is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 167% gain in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last two years, S.N.T.G.N. Transgaz burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Based on what we've seen S.N.T.G.N. Transgaz is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to to cover its interest expense with its EBIT is pretty flash. It's also worth noting that S.N.T.G.N. Transgaz is in the Gas Utilities industry, which is often considered to be quite defensive. Looking at all this data makes us feel a little cautious about S.N.T.G.N. Transgaz's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for S.N.T.G.N. Transgaz that you should be aware of.

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.