Is PBF Energy (NYSE:PBF) using too much debt?

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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that PBF Energy Inc. (NYSE:PBF) has debt on its balance sheet. But the more important question is: what risk does this debt create?

Why is debt risky?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.

See our latest analysis for PBF Energy

What is PBF Energy’s debt?

The image below, which you can click on for more details, shows that PBF Energy had $4.22 billion in debt at the end of March 2022, a reduction from $4.55 billion year-over-year. However, he has $1.43 billion in cash to offset that, resulting in a net debt of around $2.78 billion.

NYSE:PBF Debt to Equity June 5, 2022

How strong is PBF Energy’s balance sheet?

The latest balance sheet data shows that PBF Energy had liabilities of US$5.09 billion due within one year, and liabilities of US$5.34 billion falling due thereafter. In compensation for these obligations, it had cash of US$1.43 billion as well as receivables valued at US$1.76 billion due within 12 months. Thus, its liabilities total $7.22 billion more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the $4.69 billion business itself, like a child struggling under the weight of a huge backpack full of books, his gym gear and a trumpet. . We would therefore be watching his balance sheet closely, no doubt. Ultimately, PBF Energy would likely need a major recapitalization if its creditors were to demand repayment.

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). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

While PBF Energy’s debt to EBITDA ratio (4.0) suggests it uses some debt, its interest coverage is very low at 1.3, suggesting high leverage. It seems clear that the cost of borrowing money is having a negative impact on shareholder returns lately. One of the redeeming factors for PBF Energy is that it turned last year’s EBIT loss into a US$425 million gain in the last twelve months. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine PBF Energy’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, a company can only repay its debts with cold hard cash, not with book profits. It is therefore important to check how much of its earnings before interest and taxes (EBIT) converts into actual free cash flow. Over the past year, PBF Energy has actually produced more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our point of view

To be frank, PBF Energy’s level of total liabilities and its history of covering its interest expense with its EBIT makes us rather uncomfortable with its leverage levels. But on the bright side, its conversion from EBIT to free cash flow is a good sign and makes us more optimistic. Looking at the big picture, it seems clear to us that PBF Energy’s use of debt creates risks for the company. If all goes well, it can pay off, but the downside of this debt is a greater risk of permanent losses. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. We have identified 5 warning signs with PBF Energy (at least 2 of which are of concern), and understanding them should be part of your investment process.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

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.

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