Is Transocean (NYSE: RIG) using too much debt?

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Mostly, Transocean Ltd. (NYSE: RIG) is in debt. But the real question is whether this debt makes the business risky.

Why is debt risky?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous 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 consider cash and debt levels, together.

See our latest analysis for Transocean

What is Transocean’s debt?

The image below, which you can click on for more details, shows that Transocean had $7.17 billion in debt at the end of December 2021, a reduction from $7.81 billion year-over-year. However, he also had $976.0 million in cash, so his net debt is $6.19 billion.

NYSE: RIG Debt to Equity March 23, 2022

How strong is Transocean’s balance sheet?

We can see from the most recent balance sheet that Transocean had liabilities of US$1.30 billion due in one year, and liabilities of US$8.17 billion due beyond. In return, it had $976.0 million in cash and $492.0 million in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $8.01 billion.

This deficit casts a shadow over the $3.24 billion company, like a colossus towering above mere mortals. We would therefore be watching his balance sheet closely, no doubt. Ultimately, Transocean would likely need a major recapitalization if its creditors were to demand repayment. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Transocean’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, Transocean recorded a loss in EBIT and saw its turnover fall to 2.6 billion dollars, a decrease of 19%. We would much rather see growth.

Caveat Emptor

Not only has Transocean’s revenue dropped over the past twelve months, it has also produced negative earnings before interest and tax (EBIT). To be precise, the EBIT loss amounted to 32 million US dollars. Considering that, along with the liabilities mentioned above, we are nervous about the business. It would have to quickly improve its functioning so that we are interested in it. For example, we wouldn’t want to see a repeat of last year’s US$592 million loss. In the meantime, we consider the stock to be risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Know that Transocean shows 3 warning signs in our investment analysis you should know…

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 track record of earnings growth). 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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