MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság (BUSE:MOL) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság (BUSE:MOL) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its 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 September 2022 MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság had debt of Ft1.27t, up from Ft1.08t in one year. However, because it has a cash reserve of Ft725.6b, its net debt is less, at about Ft546.3b.

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 Ft2.70t falling due within a year, and liabilities of Ft1.65t due beyond that. Offsetting these obligations, it had cash of Ft725.6b as well as receivables valued at Ft1.24t due within 12 months. So it has liabilities totalling Ft2.38t more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's Ft1.67t 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.

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.

MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság's net debt is only 0.34 times its EBITDA. And its EBIT easily covers its interest expense, being 16.3 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Better yet, MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság grew its EBIT by 168% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság's interest cover was a real positive on this analysis, as was its EBIT growth rate. In contrast, our confidence was undermined by its apparent struggle to handle its total liabilities. When we consider all the factors mentioned above, we do feel a bit cautious about MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság's use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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 MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.

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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.