Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Confidence Petroleum India Limited (NSE:CONFIPET) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Confidence Petroleum India
What Is Confidence Petroleum India's Net Debt?
As you can see below, Confidence Petroleum India had ₹765.5m of debt at March 2019, down from ₹815.3m a year prior. However, it does have ₹578.6m in cash offsetting this, leading to net debt of about ₹186.9m.
A Look At Confidence Petroleum India's Liabilities
We can see from the most recent balance sheet that Confidence Petroleum India had liabilities of ₹679.5m falling due within a year, and liabilities of ₹1.39b due beyond that. Offsetting these obligations, it had cash of ₹578.6m as well as receivables valued at ₹576.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹912.4m.
Since publicly traded Confidence Petroleum India shares are worth a total of ₹7.16b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
With net debt sitting at just 0.14 times EBITDA, Confidence Petroleum India is arguably pretty conservatively geared. And it boasts interest cover of 9.0 times, which is more than adequate. On top of that, Confidence Petroleum India grew its EBIT by 70% 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 you can't view debt in total isolation; since Confidence Petroleum India will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.