Would Oil Company Bashneft (MCX:BANE) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Public Joint Stock Oil Company Bashneft (MCX:BANE) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Oil Company Bashneft

What Is Oil Company Bashneft's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Oil Company Bashneft had debt of ₽129.1b, up from ₽120.4b in one year. On the flip side, it has ₽16.1b in cash leading to net debt of about ₽113.0b.

A Look At Oil Company Bashneft's Liabilities

According to the last reported balance sheet, Oil Company Bashneft had liabilities of ₽94.0b due within 12 months, and liabilities of ₽223.1b due beyond 12 months. Offsetting this, it had ₽16.1b in cash and ₽151.3b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₽149.8b.

While this might seem like a lot, it is not so bad since Oil Company Bashneft has a market capitalization of ₽265.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Oil Company Bashneft's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Oil Company Bashneft had a loss before interest and tax, and actually shrunk its revenue by 41%, to ₽382b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Oil Company Bashneft's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₽11b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₽3.0b of cash over the last year. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Oil Company Bashneft (1 makes us a bit uncomfortable) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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