We Think MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság (BUSE:MEGAKRAN) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság (BUSE:MEGAKRAN) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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

How Much Debt Does MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság Carry?

The image below, which you can click on for greater detail, shows that at June 2021 MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság had debt of Ft1.19b, up from Ft1.04b in one year. However, it also had Ft42.0m in cash, and so its net debt is Ft1.15b.

A Look At MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság's Liabilities

The latest balance sheet data shows that MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság had liabilities of Ft1.30b due within a year, and liabilities of Ft1.63b falling due after that. Offsetting this, it had Ft42.0m in cash and Ft354.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Ft2.53b.

MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság has a market capitalization of Ft6.30b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság wasn't profitable at an EBIT level, but managed to grow its revenue by 4.6%, to Ft1.8b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság produced an earnings before interest and tax (EBIT) loss. Indeed, it lost Ft197m at the EBIT level. 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. However, it doesn't help that it burned through Ft902m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for MEGAKRÁN Kereskedelmi és Szolgáltató Nyilvánosan Muködo Részvénytársaság (1 is concerning!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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