These 4 Measures Indicate That Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság (BUSE:MTELEKOM) Is Using Debt Reasonably Well

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.' 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. 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?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

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

What Is Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's Debt?

As you can see below, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság had Ft365.9b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have Ft23.6b in cash offsetting this, leading to net debt of about Ft342.3b.

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

According to the last reported balance sheet, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság had liabilities of Ft301.9b due within 12 months, and liabilities of Ft407.4b due beyond 12 months. On the other hand, it had cash of Ft23.6b and Ft204.8b worth of receivables due within a year. So it has liabilities totalling Ft480.8b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of Ft722.4b, so it does suggest shareholders should keep an eye on Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its 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).

While Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's low debt to EBITDA ratio of 1.5 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 6.1 times last year does give us pause. So we'd recommend keeping a close eye on the impact financing costs are having on the business. Also positive, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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 we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

The good news is that Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. But, on a more sombre note, we are a little concerned by its level of total liabilities. Taking all this data into account, it seems to us that Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.