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.’ 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 Gaztransport & Technigaz SA (EPA:GTT) makes use of debt. But the more important question is: how much risk is that debt creating?
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Gaztransport & Technigaz
How Much Debt Does Gaztransport & Technigaz Carry?
As you can see below, at the end of December 2023, Gaztransport & Technigaz had €8.34m of debt, up from €2.91m a year ago. Click the image for more detail. But it also has €267.5m in cash to offset that, meaning it has €259.2m net cash.
How Strong Is Gaztransport & Technigaz’s Balance Sheet?
The latest balance sheet data shows that Gaztransport & Technigaz had liabilities of €268.1m due within a year, and liabilities of €11.9m falling due after that. Offsetting this, it had €267.5m in cash and €212.4m in receivables that were due within 12 months. So it actually has €199.8m more liquid assets than total liabilities.
This short term liquidity is a sign that Gaztransport & Technigaz could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Gaztransport & Technigaz boasts net cash, so it’s fair to say it does not have a heavy debt load!
In addition to that, we’re happy to report that Gaztransport & Technigaz has boosted its EBIT by 53%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Gaztransport & Technigaz’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Gaztransport & Technigaz 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, Gaztransport & Technigaz recorded free cash flow worth a fulsome 89% of its EBIT, which is stronger than we’d usually expect. That puts it in a very strong position to pay down debt.
Summing Up
While it is always sensible to investigate a company’s debt, in this case Gaztransport & Technigaz has €259.2m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €173m, being 89% of its EBIT. So is Gaztransport & Technigaz’s debt a risk? It doesn’t seem so to us. 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. These risks can be hard to spot. Every company has them, and we’ve spotted 2 warning signs for Gaztransport & Technigaz (of which 1 is a bit unpleasant!) you should know about.
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.
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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.