David Eben put it well: “Volatility is not a risk we care about.” Our focus is to avoid permanent loss of capital. ” It’s only natural to consider a company’s balance sheet when you consider how risky it is, because debt is often involved when a business collapses. the important thing is, phillips 66 (NYSE:PSX) has debt. But is this debt a concern for shareholders?
When is debt dangerous?
Generally, debt only becomes a real problem if a company cannot easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company may go bankrupt if it is unable to pay its creditors. But a more common (but still expensive) situation is when a company needs to dilute shareholders at a cheap share price just to manage its debt. Having said that, the most common situation is one in which a company manages its debt reasonably well and to its own advantage. The first thing to do when considering how much debt a company uses is to look at its cash and debt together.
Check out our latest analysis for Phillips 66.
What is Phillips 66 debt?
Click on the image below for greater detail, but at December 2023 Phillips 66 had debt of US$19.1b, up from US$16.9b in one year. However, since the company has his cash of US$3.32b, its net debt is less than that, at around US$15.7b.
How healthy is Phillips 66’s balance sheet?
The latest balance sheet data shows that Phillips 66 had liabilities of US$15.9b falling due within a year, and liabilities of US$28.0b falling due within a year. Offsetting this, it had cash of US$3.32b and his receivables of US$11.7b due within 12 months. So it has liabilities of US$28.8b more than its cash and short-term receivables, combined.
While this may seem like a lot, Phillips 66 has a hefty market capitalization of US$72.5b, so it’s not that bad and could probably strengthen its balance sheet by raising capital if needed. . However, it’s still worth carefully considering the company’s ability to repay its debt.
We look at net debt divided by earnings before interest, tax, depreciation and amortization (EBITDA) and calculate how easily a company’s earnings before interest, tax, depreciation and amortization (EBIT) cover interest. Measure your debt load. Expenses (interest burden). The advantage of this approach is that it takes into account both the absolute amount of debt (net debt to EBITDA) and the actual interest expense associated with that debt (interest cover ratio).
Phillips 66’s net debt to EBITDA ratio is around 1.6, suggesting a moderate use of debt. Additionally, EBIT is an overwhelming 13.9 times interest expense, meaning that the company’s debt burden is as light as a peacock’s feather. But the bad news is that Phillips 66’s EBIT plummeted 17% in the last twelve months. If this rate of decline in profits continues, the company could find itself in a predicament. There’s no question that we learn most about debt from the balance sheet. But ultimately, the future profitability of the business will determine whether Phillips 66 can strengthen its balance sheet over the long term.If you’re focused on the future, check this out free A report showing analyst profit forecasts.
Finally, companies can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of his EBIT that is matched by actual free cash flow. Over the past three years, Phillips 66 recorded free cash flow equivalent to 96% of his EBIT. This is more powerful than normally expected. This puts you in a favorable position to pay off your debt if you wish.
our view
Phillips 66’s ability to cover its interest expense with EBIT, and its conversion of EBIT to free cash flow, gives us peace of mind that it can handle its debt. But to tell you the truth, we struggled quite a bit with the EBIT growth rate. Considering this range of data points, we think Phillips 66 is in a good position to manage its debt levels. However, you need to be careful. Debt levels are considered to be sufficient to warrant continued monitoring. There’s no question that we learn most about debt from the balance sheet. Ultimately, however, any company can contain risks that exist outside the balance sheet.Case in point: we discovered 2 warning signs for Phillips 66 You should know, one of them is a little worrying.
After all, it may be easier to focus on companies that don’t even need to take on debt.Readers can access a list of growth stocks with zero net debt completely freeright 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 using only unbiased methodologies, and the articles are not intended as financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
