Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Interregional Distribution Grid Company of South Public Joint Stock Company (MCX:MRKY) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Interregional Distribution Grid Company of South
What Is Interregional Distribution Grid Company of South’s Net Debt?
As you can see below, Interregional Distribution Grid Company of South had ₽25.3b of debt, at September 2019, which is about the same the year before. You can click the chart for greater detail. However, it also had ₽837.3m in cash, and so its net debt is ₽24.4b.
How Strong Is Interregional Distribution Grid Company of South’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Interregional Distribution Grid Company of South had liabilities of ₽11.6b due within 12 months and liabilities of ₽27.3b due beyond that. Offsetting these obligations, it had cash of ₽837.3m as well as receivables valued at ₽11.6b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₽26.5b.
The deficiency here weighs heavily on the ₽4.30b 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’d watch its balance sheet closely, without a doubt. After all, Interregional Distribution Grid Company of South would likely require a major re-capitalisation if it had to pay its creditors today.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
While Interregional Distribution Grid Company of South’s debt to EBITDA ratio (4.0) suggests that it uses some debt, its interest cover is very weak, at 1.8, suggesting high leverage. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. Another concern for investors might be that Interregional Distribution Grid Company of South’s EBIT fell 13% in the last year. If things keep going like that, handling the debt will about as easy as bundling an angry house cat into its travel box. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Interregional Distribution Grid Company of South can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it’s worth checking how much of that EBIT is backed by free cash flow. Considering the last three years, Interregional Distribution Grid Company of South actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.
Our View
To be frank both Interregional Distribution Grid Company of South’s interest cover and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. And furthermore, its EBIT growth rate also fails to instill confidence. We should also note that Electric Utilities industry companies like Interregional Distribution Grid Company of South commonly do use debt without problems. After considering the datapoints discussed, we think Interregional Distribution Grid Company of South has too much debt. That sort of riskiness is ok for some, but it certainly doesn’t float our boat. 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. Take risks, for example – Interregional Distribution Grid Company of South has 5 warning signs (and 1 which is a bit unpleasant) we think you should know about.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
If you spot an error that warrants correction, please contact the editor at [email protected]. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
Discounted cash flow calculation for every stock
Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.
