Is PJSC Tatneft (MCX:TATN) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies PJSC Tatneft (MCX:TATN) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for PJSC Tatneft

How Much Debt Does PJSC Tatneft Carry?

The image below, which you can click on for greater detail, shows that PJSC Tatneft had debt of ₽33.9b at the end of September 2021, a reduction from ₽35.6b over a year. But on the other hand it also has ₽153.2b in cash, leading to a ₽119.4b net cash position.

How Strong Is PJSC Tatneft's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PJSC Tatneft had liabilities of ₽393.9b due within 12 months and liabilities of ₽140.6b due beyond that. On the other hand, it had cash of ₽153.2b and ₽125.7b worth of receivables due within a year. So its liabilities total ₽255.6b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because PJSC Tatneft is worth a massive ₽1.08t, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, PJSC Tatneft boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that PJSC Tatneft has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. 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 PJSC Tatneft'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. 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. Over the most recent three years, PJSC Tatneft recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While PJSC Tatneft does have more liabilities than liquid assets, it also has net cash of ₽119.4b. And it impressed us with its EBIT growth of 26% over the last year. So is PJSC Tatneft's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for PJSC Tatneft that you should be aware of before investing here.

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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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.