Is Interregional Distribution Grid Company of Center and Volga Region (MCX:MRKP) A Risky Investment?

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. We note that Interregional Distribution Grid Company of Center and Volga Region, Public Joint Stock Company (MCX:MRKP) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Interregional Distribution Grid Company of Center and Volga Region

How Much Debt Does Interregional Distribution Grid Company of Center and Volga Region Carry?

The image below, which you can click on for greater detail, shows that at September 2019 Interregional Distribution Grid Company of Center and Volga Region had debt of ₽25.2b, up from ₽22.1b in one year. However, it also had ₽2.09b in cash, and so its net debt is ₽23.1b.

MISX:MRKP Historical Debt, February 10th 2020
MISX:MRKP Historical Debt, February 10th 2020

How Strong Is Interregional Distribution Grid Company of Center and Volga Region’s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Interregional Distribution Grid Company of Center and Volga Region had liabilities of ₽25.3b due within 12 months and liabilities of ₽24.2b due beyond that. Offsetting this, it had ₽2.09b in cash and ₽23.4b in receivables that were due within 12 months. So it has liabilities totalling ₽24.0b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₽26.0b. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry.

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.

Interregional Distribution Grid Company of Center and Volga Region has net debt of just 1.2 times EBITDA, indicating that it is certainly not a reckless borrower. And it boasts interest cover of 7.2 times, which is more than adequate. It is just as well that Interregional Distribution Grid Company of Center and Volga Region’s load is not too heavy, because its EBIT was down 41% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Center and Volga Region 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 company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Interregional Distribution Grid Company of Center and Volga Region’s free cash flow amounted to 22% of its EBIT, less than we’d expect. That’s not great, when it comes to paying down debt.

Our View

Mulling over Interregional Distribution Grid Company of Center and Volga Region’s attempt at (not) growing its EBIT, we’re certainly not enthusiastic. But at least it’s pretty decent at managing its debt, based on its EBITDA,; that’s encouraging. We should also note that Electric Utilities industry companies like Interregional Distribution Grid Company of Center and Volga Region commonly do use debt without problems. Overall, we think it’s fair to say that Interregional Distribution Grid Company of Center and Volga Region has enough debt that there are some real risks around the balance sheet. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we’ve discovered 3 warning signs for Interregional Distribution Grid Company of Center and Volga Region that you should be aware of before investing here.

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.

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.

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