These 4 Measures Indicate That MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság (BUSE:MOL) Is Using Debt Extensively

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 the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

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

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

As you can see below, MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság had Ft1.06t of debt at September 2024, down from Ft1.12t a year prior. On the flip side, it has Ft302.6b in cash leading to net debt of about Ft760.5b.

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

The latest balance sheet data shows that MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság had liabilities of Ft1.87t due within a year, and liabilities of Ft1.58t falling due after that. Offsetting these obligations, it had cash of Ft302.6b as well as receivables valued at Ft1.12t due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Ft2.03t.

When you consider that this deficiency exceeds the company's Ft1.82t market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (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 0.65 times EBITDA, suggesting it could ramp leverage without breaking a sweat. And remarkably, despite having net debt, it actually received more in interest over the last twelve months than it had to pay. So it's fair to say it can handle debt like a hotshot teppanyaki chef handles cooking. Fortunately, MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság grew its EBIT by 5.1% in the last year, making that debt load look even more manageable. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság's free cash flow amounted to 49% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság's level of total liabilities and conversion of EBIT to free cash flow definitely weigh on it, in our esteem. But the good news is it seems to be able to cover its interest expense with its EBIT with ease. We think that MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. 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. We've identified 2 warning signs with MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság (at least 1 which makes us a bit uncomfortable) , 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.

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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.