Here's Why PJSC Tatneft (MCX:TATN) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, PJSC Tatneft (MCX:TATN) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for PJSC Tatneft

What Is PJSC Tatneft's Debt?

The image below, which you can click on for greater detail, shows that PJSC Tatneft had debt of ₽34.4b at the end of March 2021, a reduction from ₽64.4b over a year. However, its balance sheet shows it holds ₽98.0b in cash, so it actually has ₽63.6b net cash.

How Healthy Is PJSC Tatneft's Balance Sheet?

The latest balance sheet data shows that PJSC Tatneft had liabilities of ₽307.8b due within a year, and liabilities of ₽134.6b falling due after that. On the other hand, it had cash of ₽98.0b and ₽127.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₽217.2b.

Of course, PJSC Tatneft has a titanic market capitalization of ₽1.20t, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, PJSC Tatneft boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact PJSC Tatneft's saving grace is its low debt levels, because its EBIT has tanked 35% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if PJSC Tatneft 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. PJSC Tatneft 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. During the last three years, PJSC Tatneft produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While PJSC Tatneft does have more liabilities than liquid assets, it also has net cash of ₽63.6b. So we don't have any problem with PJSC Tatneft's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with PJSC Tatneft .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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