According to an analysis by Simply Wall St, one of the key factors in determining the riskiness of a company is its use of debt. Excessive debt can lead to financial ruin and permanent loss for shareholders. Therefore, it is crucial to evaluate how a company manages its debt and whether it has the means to pay it off.
When is Debt Dangerous?
Debt becomes a real problem when a company is unable to easily repay its debt, either through raising capital or generating sufficient cash flow. In the worst-case scenario, a company may go bankrupt if it cannot meet its debt obligations. Additionally, indebted companies may dilute shareholder value by raising capital at distressed prices.
However, debt can also provide advantages by serving as cheap capital, especially when it allows a company to reinvest at high rates of return. Therefore, it is important to assess a company’s overall financial health by considering its cash position alongside its debt.
ConocoPhillips’ Debt Levels
As of June 2023, ConocoPhillips had a total debt of US$15.2 billion, which remained relatively stable compared to the previous year. However, the company also had US$6.82 billion in cash, resulting in a net debt of about US$8.43 billion.
Examining ConocoPhillips’ liabilities, the company had US$9.55 billion in short-term liabilities due within 12 months, and US$32.5 billion in long-term liabilities due beyond 12 months. On the other hand, it had US$6.82 billion in cash and US$4.53 billion in receivables due within 12 months. This means that the company’s total liabilities exceeded its combination of cash and short-term receivables by approximately US$30.7 billion.
Nevertheless, ConocoPhillips has a substantial market capitalization of US$143.7 billion, which suggests that it could strengthen its balance sheet by raising capital if necessary. However, it is essential to closely evaluate the company’s ability to manage its debt without diluting shareholder value.
Assessing Debt Load and Financial Performance
To understand the impact of debt on ConocoPhillips’ earnings power, its net debt is divided by its earnings before interest, tax, depreciation, and amortization (EBITDA). The company has a relatively low net debt to EBITDA ratio of 0.29, indicating that its debt load is manageable. Additionally, its EBIT covers its interest expense 37.7 times over, which suggests that the company has a robust ability to meet its interest obligations.
However, it is worth noting that ConocoPhillips’ EBIT declined by 11% over the past year. If this trend continues, it could pose challenges for the company’s financial stability. Therefore, it is crucial to monitor ConocoPhillips’ future earnings to assess its ability to maintain a healthy balance sheet.
Conclusion
Based on the analysis, ConocoPhillips appears to be capable of handling its current debt levels. The company’s ability to cover its interest expenses with its earnings is reassuring. However, investors should be mindful of the declining EBIT and continue to monitor the company’s financial performance. Overall, while debt can be advantageous in certain situations, it is essential to assess a company’s overall financial health and its ability to manage debt without incurring significant risks.
Source: Simply Wall St (Note: This article is for informational purposes only and does not constitute financial advice)
Definitions:
– Debt: Money owed by a company to lenders or creditors.
– Net Debt: Total debt minus cash and cash equivalents.
– EBITDA: Earnings before interest, tax, depreciation, and amortization.
– EBIT: Earnings before interest and tax.
– Cash Flow: The amount of money flowing in and out of a company.
– Liabilities: Debts or obligations owed by a company.
– Market Capitalization: The total value of a company’s outstanding shares.
– Earnings Power: The ability of a company to generate profits.
– Interest Expense: The cost of borrowing money.