Is Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság (BUSE:MTELEKOM) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság (BUSE:MTELEKOM) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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 step when considering a company's debt levels is to consider 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?

You can click the graphic below for the historical numbers, but it shows that Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság had Ft328.4b of debt in June 2024, down from Ft388.9b, one year before. However, it also had Ft15.9b in cash, and so its net debt is Ft312.5b.

How Healthy 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 Ft282.1b due within 12 months and liabilities of Ft391.7b due beyond that. Offsetting these obligations, it had cash of Ft15.9b as well as receivables valued at Ft227.1b due within 12 months. So it has liabilities totalling Ft430.8b more than its cash and near-term receivables, combined.

Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság has a market capitalization of Ft930.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság has a low net debt to EBITDA ratio of only 0.93. And its EBIT covers its interest expense a whopping 10.9 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság grew its EBIT by 59% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság can strengthen its balance sheet over time. 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. During the last three years, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's EBIT growth rate suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But, on a more sombre note, we are a little concerned by its level of total liabilities. Zooming out, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. 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. For example, we've discovered 2 warning signs for Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság that you should be aware of before investing here.

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.