PJSC LUKOIL (MCX:LKOH) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 PJSC LUKOIL (MCX:LKOH) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for PJSC LUKOIL

What Is PJSC LUKOIL's Net Debt?

You can click the graphic below for the historical numbers, but it shows that PJSC LUKOIL had ₽441.5b of debt in June 2021, down from ₽600.6b, one year before. However, it does have ₽555.3b in cash offsetting this, leading to net cash of ₽113.7b.

A Look At PJSC LUKOIL's Liabilities

The latest balance sheet data shows that PJSC LUKOIL had liabilities of ₽1.28t due within a year, and liabilities of ₽924.9b falling due after that. On the other hand, it had cash of ₽555.3b and ₽640.7b worth of receivables due within a year. So it has liabilities totalling ₽1.01t more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since PJSC LUKOIL has a huge market capitalization of ₽4.51t, 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. While it does have liabilities worth noting, PJSC LUKOIL also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that PJSC LUKOIL has boosted its EBIT by 43%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine PJSC LUKOIL'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While PJSC LUKOIL has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, PJSC LUKOIL recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While PJSC LUKOIL does have more liabilities than liquid assets, it also has net cash of ₽113.7b. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in ₽475b. So is PJSC LUKOIL's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example PJSC LUKOIL has 2 warning signs (and 1 which is concerning) we think 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.

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.

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