These 4 measures indicate that Conocophillips (nyse: COP) reasonably uses its debt


Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every Practical investor that I know is worried “. 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. Above all, Conoco Phillips (NYSE: COP) is in debt. But does this debt concern shareholders?

When is debt dangerous?

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. In the end, if the company cannot fulfill its legal obligations to reimburse the debt, shareholders could leave without anything. However, a more common (but still painful) scenario is that it must raise new low -cost equity, thus permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.

Discover our latest analysis for Conocophillips

What is the net debt of Conocophillips?

The graph below, on which you can click for more details, shows that Conocophillips had a debt of $ 18.7 billion in March 2022; About the same as the previous year. However, it has $ 7.14 billion in liquidity to compensate for this, which leads to net debt of about $ 11.6 billion.


What is the solidity of the Conocophillips assessment?

We can see from the most recent balance sheet that ConocoPhillips had US$11.6 billion in liabilities maturing in one year, and US$32.5 billion in liabilities due beyond. As compensation for these obligations, it had cash of US$7.14 billion as well as receivables valued at US$7.88 billion due within 12 months. Thus, its liabilities prevail over the sum of its cash and its (short -term) claims of 29.1 billion dollars.

This shortfall is not that bad as ConocoPhillips is worth US$108.0 billion and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. However, it is always worth examining your ability to repay your debt.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Conocophillips has a low net debt ratio on Baiia only 0.46. And its EBIT easily covers its interest charges, 21.8 times the size. You could therefore say that it is no more threatened by its debt than an elephant is by a mouse. Although ConocoPhillips posted a loss in EBIT last year, it was also good to see that it generated $18 billion in EBIT in the last twelve months. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide if Conocophillips can strengthen its balance sheet over time. 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 worth checking what share of the profit before interest and taxes (EBIT) is supported by the available cash flows. In the most recent year, ConocoPhillips recorded free cash flow of 69% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This sounding and stumbling money allows him to reduce his debt when he wants.

Our point of view

Fortunately, the impressive coverage of Conocophillips interests implies that it has the upper hand on its debt. And this is only the beginning of good news since its clear debt on Ebitda is also very pleasing. When we consider the range of factors above, it seems that Conocophillips is quite sensitive with its use of the debt. Although this involves certain risks, this can also improve yields for shareholders. The balance sheet is clearly the area to focus on when analyzing debt. But in the end, each company can contain risks that exist outside the balance sheet. To do this, you must find out about 3 warning signs We have spotted with Conocophillips (including 1 that should not be overlooked).

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a profits growth history). It’s free.

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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