We Think PJSC Tatneft (MCX:TATN) Can Stay On Top Of Its 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. Importantly, PJSC Tatneft (MCX:TATN) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. 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.

Check out 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 ₽32.6b at the end of June 2021, a reduction from ₽51.5b over a year. But it also has ₽130.9b in cash to offset that, meaning it has ₽98.2b net cash.

A Look At PJSC Tatneft's Liabilities

We can see from the most recent balance sheet that PJSC Tatneft had liabilities of ₽350.0b falling due within a year, and liabilities of ₽137.2b due beyond that. Offsetting these obligations, it had cash of ₽130.9b as well as receivables valued at ₽129.0b due within 12 months. So it has liabilities totalling ₽227.3b more than its cash and near-term receivables, combined.

PJSC Tatneft has a very large market capitalization of ₽1.13t, so it could very likely raise cash to ameliorate 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. While it does have liabilities worth noting, PJSC Tatneft also has more cash than debt, so we're pretty confident it can manage its debt safely.

While PJSC Tatneft doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 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 ₽98.2b. So we are not troubled with PJSC Tatneft's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that PJSC Tatneft is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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. 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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