Is Gibson Energy (TSE:GEI) using too much debt?

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Gibson Energy Inc. (TSE:GEI) is in debt. But the real question is whether this debt makes the business risky.

Why is debt risky?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.

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What is Gibson Energy’s debt?

The graph below, which you can click on for more details, shows that Gibson Energy had C$1.58 billion in debt as of June 2022; about the same as the previous year. However, he has C$38.8 million in cash to offset this, resulting in a net debt of approximately C$1.54 billion.

How strong is Gibson Energy’s balance sheet?

We can see from the most recent balance sheet that Gibson Energy had liabilities of C$1.19 billion due in one year, and liabilities of C$1.86 billion due beyond. In return, he had C$38.8 million in cash and C$973.2 million in debt due within 12 months. It therefore has liabilities totaling C$2.04 billion more than its cash and short-term receivables, combined.

This is a mountain of leverage compared to its market capitalization of C$3.14 billion. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Gibson Energy’s debt is 3.7 times its EBITDA and its EBIT covers its interest expense 4.6 times. This suggests that while debt levels are significant, we will refrain from labeling them as problematic. It should be noted that Gibson Energy’s EBIT has jumped like bamboo after rain, gaining 45% over the last twelve months. This will make it easier to manage your debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Gibson Energy can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Gibson Energy has generated free cash flow of a very strong 93% of EBIT, more than expected. This puts him in a very strong position to pay off the debt.

Our point of view

Gibson Energy’s conversion of EBIT to free cash flow suggests it can manage its debt as easily as Cristiano Ronaldo could score a goal against an Under-14 keeper. But truth be told, we think its net debt to EBITDA somewhat undermines that impression. All told, it looks like Gibson Energy can comfortably manage its current level of debt. On the plus side, this leverage can increase shareholder returns, but the potential downside is more risk of loss, so it’s worth keeping an eye on the balance sheet. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. Know that Gibson Energy shows 2 warning signs in our investment analysis you should know…

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-flowing growth stocks without further ado.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.