Is Exxon Mobil (NYSE:XOM) A Risky Investment? - Yahoo Finance

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Exxon Mobil Corporation (NYSE:XOM) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Exxon Mobil

How Much Debt Does Exxon Mobil Carry?

You can click the graphic below for the historical numbers, but it shows that Exxon Mobil had US$41.3b of debt in September 2023, down from US$45.4b, one year before. However, it also had US$32.9b in cash, and so its net debt is US$8.31b.

debt-equity-history-analysis

A Look At Exxon Mobil's Liabilities

Zooming in on the latest balance sheet data, we can see that Exxon Mobil had liabilities of US$71.2b due within 12 months and liabilities of US$93.5b due beyond that. On the other hand, it had cash of US$32.9b and US$41.8b worth of receivables due within a year. So its liabilities total US$90.0b more than the combination of its cash and short-term receivables.

Exxon Mobil has a very large market capitalization of US$418.3b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Exxon Mobil's net debt is only 0.12 times its EBITDA. And its EBIT covers its interest expense a whopping 69.9 times over. So we're pretty relaxed about its super-conservative use of debt. On the other hand, Exxon Mobil's EBIT dived 19%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Exxon Mobil can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Exxon Mobil generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

Exxon Mobil's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But the stark truth is that we are concerned by its EBIT growth rate. All these things considered, it appears that Exxon Mobil can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Exxon Mobil you should be aware of.

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.

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

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.

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2023-10-28 11:00:21Z
CBMiSGh0dHBzOi8vZmluYW5jZS55YWhvby5jb20vbmV3cy9leHhvbi1tb2JpbC1ueXNlLXhvbS1yaXNreS0xMTAwMjE4OTkuaHRtbNIBUGh0dHBzOi8vZmluYW5jZS55YWhvby5jb20vYW1waHRtbC9uZXdzL2V4eG9uLW1vYmlsLW55c2UteG9tLXJpc2t5LTExMDAyMTg5OS5odG1s

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