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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság (BUSE:MOL) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

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

What Is MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság had debt of Ft1.12t, up from Ft890.2b in one year. However, it also had Ft780.5b in cash, and so its net debt is Ft338.6b.

How Strong Is MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság's Balance Sheet?

We can see from the most recent balance sheet that MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság had liabilities of Ft2.53t falling due within a year, and liabilities of Ft1.42t due beyond that. On the other hand, it had cash of Ft780.5b and Ft943.8b worth of receivables due within a year. So it has liabilities totalling Ft2.23t more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's Ft1.69t market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

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's net debt is only 0.20 times its EBITDA. And its EBIT easily covers its interest expense, being 16.9 times the size. So we're pretty relaxed about its super-conservative use of debt. Better yet, MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság grew its EBIT by 104% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság 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. During the last three years, MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság produced sturdy free cash flow equating to 67% of its EBIT, about what we'd expect. 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 interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its level of total liabilities has the opposite effect. Looking at all the aforementioned factors together, it strikes us that MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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. To that end, you should learn about the 2 warning signs we've spotted with MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság (including 1 which can't be ignored) .

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.