Warren Buffett said: “Volatility is far from synonymous with risk”. It is natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Mostly, Occidental Petroleum Corporation (NYSE: OXY) has debt. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debt and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting shareholders because lenders are forcing them to raise capital at a difficult price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.
Discover our latest analyzes for Occidental Petroleum
What is Occidental Petroleum’s debt?
The image below, which you can click for more details, shows that Occidental Petroleum had $ 36.9 billion in debt at the end of March 2021, a reduction of $ 40.2 billion over one year. . However, it has US $ 2.27 billion in cash to compensate for this, leading to a net debt of around US $ 34.7 billion.
A look at the responsibilities of Occidental Petroleum
The latest balance sheet data shows that Occidental Petroleum had commitments of US $ 8.63 billion due within one year and commitments of US $ 52.4 billion thereafter. In return for these obligations, it had cash of US $ 2.27 billion as well as receivables valued at US $ 3.05 billion due within 12 months. It therefore has liabilities totaling $ 55.7 billion more than its cash and short-term receivables combined.
The deficiency here weighs heavily on the US $ 23.4 billion company itself, as if a child struggles under the weight of a huge backpack full of books, his gym equipment and a trumpet. So we would be watching its record closely, without a doubt. Ultimately, Occidental Petroleum would likely need a major recapitalization if its creditors demanded repayment. 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 Occidental Petroleum can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
Over the past year, Occidental Petroleum has incurred a loss before interest and taxes and has actually reduced revenues by 30% to US $ 16 billion. To be frank, that doesn’t bode well.
While Occidental Petroleum’s decline in earnings is about as comforting as a wet blanket, arguably, its earnings before loss of interest and taxes (EBIT) are even less attractive. Its EBIT loss amounted to US $ 8.7 billion. Whereas, along with the responsibilities mentioned above, we are nervous for the company. We’d like to see big improvements in the short term before we get too interested in the action. For example, we wouldn’t want to see a repeat of the US $ 12 billion loss last year. And until then, we think it’s risky action. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. To this end, you must be aware of the 2 warning signs we spotted with Occidental Petroleum.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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