Does the Interregional Distribution Network Company of the Center and the Volga (MCX: MRKP) have a healthy balance sheet?
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Mostly, Interregional Distribution Network Company of the Center and Volga Region, Public Joint Stock Company (MCX: MRKP) carries a debt. But does this debt worry shareholders?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. 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 both liquidity and debt levels.
Check out our latest review for the Central and Volga Region Interregional Distribution Network Company
What is the debt of the Interregional Distribution Network Company of the Center and the Volga?
As you can see below, the Central and Volga Region Interregional Distribution Network Company had 26.3 billion yen in debt, as of December 2020, which is roughly the same as the last year. You can click on the graph for more details. However, he also had 1.76 billion yen in cash, so his net debt is 24.5 billion yen.
A look at the responsibilities of the interregional distribution network company of the Center and the Volga
The latest balance sheet data shows that the Central and Volga Region Interregional Distribution Network Company had liabilities of 29.8 billion yen due within one year, and liabilities of 27.0 billion yen. billion yen maturing after that. In compensation for these obligations, he had cash of 1.76 billion euros as well as receivables valued at 15.6 billion euros within 12 months. It therefore has liabilities totaling 39.5 billion yen more than its cash and short-term receivables combined.
Given that this deficit is actually greater than the company’s market cap of 33.0 billion yen, we believe shareholders should really watch the debt levels of the Interregional Distribution Grid Company of Center and Volga Region. , like a parent watching their child ride a bike for the first time. Hypothetically, extremely high dilution would be required if the company were forced to repay its debts by raising capital at the current share price.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
While the low debt-to-EBITDA ratio of the Central and Volga Interregional Distribution System Company of 1.2 suggests only a modest use of debt, the fact that EBIT did not cover interest expense that 6.6 times last year makes us think. We therefore recommend that you keep a close eye on the impact of financing costs on the business. It is also interesting to note that the interregional distribution network company of the Center and the Volga region has increased its EBIT by 15% over the last year, further increasing its capacity to manage debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But in the long term, the future profitability of the company will decide whether the Company of the Interregional Distribution Network of the Center and the Volga can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. During the last three years, the Interregional Distribution Network Company of the Center and the Volga Region has created a free cash flow of 16% of its EBIT, a performance of no interest. This low level of cash conversion undermines its ability to manage and repay its debts.
Our point of view
The level of total liabilities of the Central and Volga Region Interregional Distribution System Company and its conversion from EBIT to free cash flow has been disheartening. But it’s not that bad to increase your EBIT. It should also be noted that the Interregional Distribution Grid Company of the Center and the Volga Region belongs to the electric utility sector, which is often considered quite defensive. When we consider all the factors mentioned, it seems to us that the Interregional Company of the Central and Volga Distribution Network is taking risks with its recourse to debt. So while this leverage increases ROE, we wouldn’t really want to see it increase from here. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, every business can contain risks that exist off the balance sheet. Please note that the Interregional Company of the Central and Volga Distribution Network displays 2 warning signs in our investment analysis , you must know…
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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