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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that PBF Energy Inc. (NYSE:PBF) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is PBF Energy's Debt?

The image below, which you can click on for greater detail, shows that PBF Energy had debt of US$1.25b at the end of March 2024, a reduction from US$1.43b over a year. However, its balance sheet shows it holds US$1.44b in cash, so it actually has US$192.9m net cash.

How Healthy Is PBF Energy's Balance Sheet?

The latest balance sheet data shows that PBF Energy had liabilities of US$3.78b due within a year, and liabilities of US$3.43b falling due after that. Offsetting these obligations, it had cash of US$1.44b as well as receivables valued at US$1.17b due within 12 months. So its liabilities total US$4.60b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$4.87b, so it does suggest shareholders should keep an eye on PBF Energy's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, PBF Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact PBF Energy's saving grace is its low debt levels, because its EBIT has tanked 64% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine PBF Energy'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. PBF Energy may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, PBF Energy recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While PBF Energy does have more liabilities than liquid assets, it also has net cash of US$192.9m. And it impressed us with free cash flow of US$357m, being 75% of its EBIT. So while PBF Energy does not have a great balance sheet, it's certainly not too bad. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with PBF Energy (at least 2 which are significant) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com