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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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. 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 Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság had debt of Ft306.7b at the end of March 2024, a reduction from Ft361.0b over a year. On the flip side, it has Ft21.1b in cash leading to net debt of about Ft285.6b.

A Look At Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's Liabilities

According to the last reported balance sheet, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság had liabilities of Ft262.9b due within 12 months, and liabilities of Ft389.5b due beyond 12 months. Offsetting this, it had Ft21.1b in cash and Ft226.0b in receivables that were due within 12 months. So it has liabilities totalling Ft405.2b more than its cash and near-term receivables, combined.

Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság has a market capitalization of Ft903.7b, 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.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With net debt sitting at just 0.91 times EBITDA, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság is arguably pretty conservatively geared. And this view is supported by the solid interest coverage, with EBIT coming in at 9.1 times the interest expense over the last year. On top of that, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság grew its EBIT by 62% 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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. Looking at the bigger picture, we think Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság you should be aware of.

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.