Oct. 25, 2021
Here is the article.
David Iben put it
well when he said, 'Volatility is not a risk we care about. What we care about
is avoiding the permanent loss of capital.' So it seems the smart money knows
that debt - which is usually involved in bankruptcies - is a very important
factor, when you assess how risky a company is. As with many other companies Occidental Petroleum Corporation (NYSE:OXY) makes use of debt. But should
shareholders be worried about its use of debt?
What
Risk Does Debt Bring?
Debt
and other liabilities become risky for a business when it cannot easily fulfill
those obligations, either with free cash flow or by raising capital at an
attractive price. Part and parcel of capitalism is the process of 'creative
destruction' where failed businesses are mercilessly liquidated by their
bankers. However, a more usual (but still expensive) situation is where a
company must dilute shareholders at a cheap share price simply to get debt
under control. Of course, the upside of debt is that it often represents cheap
capital, especially when it replaces dilution in a company with the ability to
reinvest at high rates of return. When we think about a company's use of debt,
we first look at cash and debt together.
See our latest analysis for Occidental Petroleum
What
Is Occidental Petroleum's Debt?
The
image below, which you can click on for greater detail, shows that Occidental
Petroleum had debt of US$37.2b at the end of June 2021, a reduction from
US$40.2b over a year. On the flip side, it has US$4.57b in cash leading to net
debt of about US$32.6b.
How
Strong Is Occidental Petroleum's Balance Sheet?
We
can see from the most recent balance sheet that Occidental Petroleum had
liabilities of US$9.59b falling due within a year, and liabilities of US$52.1b
due beyond that. On the other hand, it had cash of US$4.57b and US$3.29b worth
of receivables due within a year. So it has liabilities totalling US$53.8b more
than its cash and near-term receivables, combined.
The
deficiency here weighs heavily on the US$24.8b company itself, as if a child
were struggling under the weight of an enormous back-pack full of books, his
sports gear, and a trumpet. So we definitely think shareholders need to watch
this one closely. At the end of the day, Occidental Petroleum would probably
need a major re-capitalization if its creditors were to demand repayment. The
balance sheet is clearly the area to focus on when you are analysing debt. But
it is future earnings, more than anything, that will determine Occidental
Petroleum's ability to maintain a healthy balance sheet going forward. So if
you want to see what the professionals think, you might find this free report on analyst profit forecasts to
be interesting.
Over
12 months, Occidental Petroleum made a loss at the EBIT level, and saw its
revenue drop to US$20b, which is a fall of 11%. That's not what we would hope
to see.
Caveat
Emptor
While
Occidental Petroleum's falling revenue is about as heartwarming as a wet
blanket, arguably its earnings before interest and tax (EBIT) loss is even less
appealing. To be specific the EBIT loss came in at US$119m. Considering that
alongside the liabilities mentioned above make us nervous about the company. It
would need to improve its operations quickly for us to be interested in it. For
example, we would not want to see a repeat of last year's loss of US$5.2b. And
until that time we think this is a risky stock. When I consider a company to be
a bit risky, I think it is responsible to check out whether insiders have been
reporting any share sales. Luckily, you can click here ito see our graphic depicting Occidental
Petroleum insider transactions.
Of course, if you're the type of investor who
prefers buying stocks without the burden of debt, then don't hesitate to
discover our exclusive list of net cash growth stocks, today.
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