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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Public Joint-Stock Company Interregional Distribution Grid Company of Volga (MCX:MRKV) makes use of debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Interregional Distribution Grid Company of Volga's Debt?
As you can see below, Interregional Distribution Grid Company of Volga had RUруб3.38b of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it also had RUруб868.2m in cash, and so its net debt is RUруб2.51b.
MISX:MRKV Historical Debt, September 19th 2019
How Strong Is Interregional Distribution Grid Company of Volga's Balance Sheet?
According to the last reported balance sheet, Interregional Distribution Grid Company of Volga had liabilities of RUруб6.39b due within 12 months, and liabilities of RUруб9.70b due beyond 12 months. Offsetting these obligations, it had cash of RUруб868.2m as well as receivables valued at RUруб6.59b due within 12 months. So its liabilities total RUруб8.64b more than the combination of its cash and short-term receivables.
Interregional Distribution Grid Company of Volga has a market capitalization of RUруб17.6b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.
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). 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).
Interregional Distribution Grid Company of Volga has net debt of just 0.24 times EBITDA, suggesting it could ramp leverage without breaking a sweat. But the really cool thing is that it actually managed to receive more interest than it paid, over the last year. So there's no doubt this company can take on debt while staying cool as a cucumber. In fact Interregional Distribution Grid Company of Volga's saving grace is its low debt levels, because its EBIT has tanked 30% 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Interregional Distribution Grid Company of Volga's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this freereport showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Interregional Distribution Grid Company of Volga recorded free cash flow worth 59% 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.
Our View
Based on what we've seen Interregional Distribution Grid Company of Volga is not finding it easy EBIT growth rate, but the other factors we considered give us cause to be optimistic. In particular, we are dazzled with its interest cover. We would also note that Electric Utilities industry companies like Interregional Distribution Grid Company of Volga commonly do use debt without problems. Looking at all this data makes us feel a little cautious about Interregional Distribution Grid Company of Volga's debt levels. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Interregional Distribution Grid Company of Volga's earnings per share history for free.
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.
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Thank you for reading.
