PBF Energy (NYSE:PBF) Has A Somewhat Strained Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that PBF Energy Inc. (NYSE:PBF) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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.

See our latest analysis for PBF Energy

What Is PBF Energy's Net Debt?

The image below, which you can click on for greater detail, shows that PBF Energy had debt of US$1.24b at the end of September 2023, a reduction from US$1.95b over a year. But it also has US$1.89b in cash to offset that, meaning it has US$649.5m net cash.

A Look At PBF Energy's Liabilities

Zooming in on the latest balance sheet data, we can see that PBF Energy had liabilities of US$4.39b due within 12 months and liabilities of US$3.44b due beyond that. On the other hand, it had cash of US$1.89b and US$1.58b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$4.36b.

This is a mountain of leverage relative to its market capitalization of US$5.41b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, PBF Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, PBF Energy's EBIT dived 19%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if PBF Energy 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 PBF Energy 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 most recent two years, PBF Energy recorded free cash flow worth 71% 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 PBF Energy does have more liabilities than liquid assets, it also has net cash of US$649.5m. The cherry on top was that in converted 71% of that EBIT to free cash flow, bringing in US$1.3b. So although we see some areas for improvement, we're not too worried about PBF Energy's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with PBF Energy (at least 2 which are significant) , and understanding them should be part of your investment process.

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.