Here's Why MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság (BUSE:MOL) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság (BUSE:MOL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság

How Much Debt Does MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság Carry?

As you can see below, at the end of June 2022, MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság had Ft1.26t of debt, up from Ft934.7b a year ago. Click the image for more detail. On the flip side, it has Ft844.7b in cash leading to net debt of about Ft413.5b.

A Look At MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság's Liabilities

We can see from the most recent balance sheet that MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság had liabilities of Ft2.94t falling due within a year, and liabilities of Ft1.74t due beyond that. Offsetting these obligations, it had cash of Ft844.7b as well as receivables valued at Ft1.22t due within 12 months. So its liabilities total Ft2.61t more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the Ft1.58t company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság would likely require a major re-capitalisation if it had to pay its creditors today.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). 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).

MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság has net debt of just 0.30 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. Better yet, MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság grew its EBIT by 197% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság's level of total liabilities was a real negative on this analysis, although the other factors we considered were considerably better. There's no doubt that its ability to to cover its interest expense with its EBIT is pretty flash. When we consider all the elements mentioned above, it seems to us that MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság (at least 1 which is significant) , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.