Is Magnolia Oil & Gas (NYSE:MGY) Using Too Much Debt?

Warren Buffett famously said, '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, Magnolia Oil & Gas Corporation (NYSE:MGY) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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 Magnolia Oil & Gas

How Much Debt Does Magnolia Oil & Gas Carry?

As you can see below, Magnolia Oil & Gas had US$391.0m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$667.3m in cash to offset that, meaning it has US$276.3m net cash.

How Strong Is Magnolia Oil & Gas' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Magnolia Oil & Gas had liabilities of US$311.2m due within 12 months and liabilities of US$497.7m due beyond that. On the other hand, it had cash of US$667.3m and US$151.6m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Magnolia Oil & Gas' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$4.39b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Magnolia Oil & Gas boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Magnolia Oil & Gas grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. 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 Magnolia Oil & Gas 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Magnolia Oil & Gas 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, Magnolia Oil & Gas recorded free cash flow worth a fulsome 84% 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 it is always sensible to investigate a company's debt, in this case Magnolia Oil & Gas has US$276.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$758m, being 84% of its EBIT. So we don't think Magnolia Oil & Gas's use of debt is risky. 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. For example, we've discovered 2 warning signs for Magnolia Oil & Gas (1 shouldn't be ignored!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.