Is Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság (BUSE:MTELEKOM) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság (BUSE:MTELEKOM) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság

How Much Debt Does Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság Carry?

As you can see below, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság had Ft258.5b of debt at September 2024, down from Ft365.9b a year prior. However, because it has a cash reserve of Ft11.6b, its net debt is less, at about Ft247.0b.

How Strong Is Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's Balance Sheet?

The latest balance sheet data shows that Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság had liabilities of Ft205.6b due within a year, and liabilities of Ft396.6b falling due after that. On the other hand, it had cash of Ft11.6b and Ft236.2b worth of receivables due within a year. So it has liabilities totalling Ft354.4b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság has a market capitalization of Ft1.20t, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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). 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).

Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's net debt is only 0.70 times its EBITDA. And its EBIT covers its interest expense a whopping 12.4 times over. So we're pretty relaxed about its super-conservative use of debt. On top of that, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság grew its EBIT by 54% 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság recorded free cash flow worth 80% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Happily, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. Considering this range of factors, it seems to us that Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság is quite prudent with its debt, and the risks seem well managed. So we're not worried about the use of a little leverage on the balance sheet. 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 instance, we've identified 1 warning sign for Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.