Does MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság (BUSE:MEGAKRAN) Have A Healthy Balance Sheet?

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.' 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 MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság (BUSE:MEGAKRAN) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság

What Is MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság had debt of Ft1.59b, up from Ft961.0m in one year. And it doesn't have much cash, so its net debt is about the same.

How Strong Is MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság's Balance Sheet?

According to the last reported balance sheet, MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság had liabilities of Ft1.12b due within 12 months, and liabilities of Ft1.76b due beyond 12 months. Offsetting this, it had Ft9.77m in cash and Ft265.2m in receivables that were due within 12 months. So its liabilities total Ft2.60b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of Ft3.20b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság made a loss at the EBIT level, and saw its revenue drop to Ft1.6b, which is a fall of 14%. We would much prefer see growth.

Caveat Emptor

While MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at Ft245m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled Ft1.1b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For example MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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