PJSC Tatneft (MCX:TATN) Seems To Use Debt Quite Sensibly

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.' 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. We note that PJSC Tatneft (MCX:TATN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for PJSC Tatneft

What Is PJSC Tatneft's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 PJSC Tatneft had ₽35.6b of debt, an increase on ₽13.0b, over one year. However, its balance sheet shows it holds ₽44.8b in cash, so it actually has ₽9.27b net cash.

A Look At PJSC Tatneft's Liabilities

According to the last reported balance sheet, PJSC Tatneft had liabilities of ₽318.4b due within 12 months, and liabilities of ₽138.6b due beyond 12 months. Offsetting these obligations, it had cash of ₽44.8b as well as receivables valued at ₽129.1b due within 12 months. So its liabilities total ₽283.1b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since PJSC Tatneft has a huge market capitalization of ₽1.14t, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 39% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if PJSC Tatneft can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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 55% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although PJSC Tatneft's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₽9.27b. So we are not troubled with PJSC Tatneft's debt use. 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. Take risks, for example - PJSC Tatneft has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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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