Yahoo Finance Is Total Gabon (EPA:EC) A Risky Investment?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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. As with many other companies Total Gabon (EPA:EC) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Total Gabon
What Is Total Gabon's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Total Gabon had US$43.3m of debt, an increase on US$2.16m, over one year. However, it does have US$426.2m in cash offsetting this, leading to net cash of US$382.9m.
How Strong Is Total Gabon's Balance Sheet?
We can see from the most recent balance sheet that Total Gabon had liabilities of US$225.3m falling due within a year, and liabilities of US$1.95b due beyond that. On the other hand, it had cash of US$426.2m and US$426.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.32b.
This deficit casts a shadow over the US$530.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Total Gabon would likely require a major re-capitalisation if it had to pay its creditors today. Total Gabon boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.
Fortunately, Total Gabon grew its EBIT by 7.8% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Total Gabon will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Total Gabon 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. Happily for any shareholders, Total Gabon actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
While Total Gabon does have more liabilities than liquid assets, it also has net cash of US$382.9m. And it impressed us with free cash flow of US$206m, being 146% of its EBIT. So we don't have any problem with Total Gabon's use of debt. 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. To that end, you should be aware of the 4 warning signs we've spotted with Total Gabon .
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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