David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that Exxon Mobil Corporation (NYSE: XOM) uses debt in its business. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debts 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. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest review for Exxon Mobil
What is Exxon Mobil’s net debt?
As you can see below, Exxon Mobil had $ 56.2 billion in debt in March 2021, up from $ 59.6 billion the year before. However, given that it has a cash reserve of US $ 3.52 billion, its net debt is less, at around US $ 52.7 billion.
A look at the responsibilities of Exxon Mobil
The latest balance sheet data shows that Exxon Mobil had liabilities of US $ 60.2 billion due within one year and liabilities of US $ 109.5 billion due thereafter. On the other hand, he had $ 3.52 billion in cash and $ 24.8 billion in receivables due within one year. It therefore has liabilities totaling $ 141.4 billion more than its cash and short-term receivables combined.
Exxon Mobil has a very large market cap of $ 263.0 billion, so it could very likely raise funds to improve its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Exxon Mobil’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.
Over 12 months, Exxon Mobil recorded a loss in EBIT and saw sales fall to $ 182 billion, a decrease of 27%. To be frank, that doesn’t bode well.
Not only has Exxon Mobil’s revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). To be precise, the EBIT loss amounted to US $ 171 million. Considering that alongside the liabilities mentioned above, we are not convinced that the company should use so much debt. We therefore believe that its record is a bit strained, but not irreparable. We’d be better off if he turned his 12-month loss of US $ 19 billion into a profit. So, to be frank, we think it’s risky. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 1 warning sign for Exxon Mobil which you should know before investing here.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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