Yahoo Finance TGS-NOPEC Geophysical (OB:TGS) Has A Rock Solid Balance Sheet
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies TGS-NOPEC Geophysical Company ASA (OB:TGS) makes use of debt. But should shareholders be worried about its use of debt?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for TGS-NOPEC Geophysical
How Much Debt Does TGS-NOPEC Geophysical Carry?
As you can see below, TGS-NOPEC Geophysical had US$2.50m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. But it also has US$354.3m in cash to offset that, meaning it has US$351.8m net cash.
How Healthy Is TGS-NOPEC Geophysical's Balance Sheet?
According to the last reported balance sheet, TGS-NOPEC Geophysical had liabilities of US$474.7m due within 12 months, and liabilities of US$70.6m due beyond 12 months. Offsetting these obligations, it had cash of US$354.3m as well as receivables valued at US$381.5m due within 12 months. So it actually has US$190.5m more liquid assets than total liabilities.
This surplus suggests that TGS-NOPEC Geophysical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that TGS-NOPEC Geophysical has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we're happy to report that TGS-NOPEC Geophysical has boosted its EBIT by 76%, 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 TGS-NOPEC Geophysical'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, a company can only pay off debt with cold hard cash, not accounting profits. While TGS-NOPEC Geophysical 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, TGS-NOPEC Geophysical recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
Summing up
While it is always sensible to investigate a company's debt, in this case TGS-NOPEC Geophysical has US$352m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$123m, being 98% of its EBIT. So we don't think TGS-NOPEC Geophysical's use of debt is risky. Another factor that would give us confidence in TGS-NOPEC Geophysical would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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