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Is Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság (BUSE:MTELEKOM) A Risky Investment?
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.' 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 can see that Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság (BUSE:MTELEKOM) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság
What Is Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2020 Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság had debt of Ft357.6b, up from Ft300.3b in one year. However, it also had Ft33.8b in cash, and so its net debt is Ft323.8b.
How Strong Is Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság had liabilities of Ft366.0b due within 12 months and liabilities of Ft294.0b due beyond that. On the other hand, it had cash of Ft33.8b and Ft168.5b worth of receivables due within a year. So its liabilities total Ft457.7b more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's Ft413.0b 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 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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
With a debt to EBITDA ratio of 1.9, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság uses debt artfully but responsibly. And the fact that its trailing twelve months of EBIT was 7.2 times its interest expenses harmonizes with that theme. Importantly Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's EBIT was essentially flat over the last twelve months. Ideally it can diminish its debt load by kick-starting earnings growth. 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 Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
Our View
Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's level of total liabilities was a real negative on this analysis, although the other factors we considered cast it in a significantly better light. For example, its interest cover is relatively strong. Taking the abovementioned factors together we do think Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's debt poses some risks to the business. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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This article by Simply Wall St is general in nature. 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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About BUSE:MTELEKOM
Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság
Provides fixed-line and mobile telecommunication services for residential and business customers in Hungary, Bulgaria, Romania, and the Republic of North Macedonia.
Solid track record with excellent balance sheet.