These 4 Measures Indicate That Chelyabinsk Forge-and-Press Plant (MCX:CHKZ) Is Using Debt Extensively

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.' 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 Chelyabinsk Forge-and-Press Plant, Public Joint Stock Company (MCX:CHKZ) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Chelyabinsk Forge-and-Press Plant

How Much Debt Does Chelyabinsk Forge-and-Press Plant Carry?

As you can see below, at the end of March 2021, Chelyabinsk Forge-and-Press Plant had ₽5.00b of debt, up from ₽4.33b a year ago. Click the image for more detail. On the flip side, it has ₽317.8m in cash leading to net debt of about ₽4.68b.

A Look At Chelyabinsk Forge-and-Press Plant's Liabilities

According to the last reported balance sheet, Chelyabinsk Forge-and-Press Plant had liabilities of ₽8.58b due within 12 months, and liabilities of ₽2.10b due beyond 12 months. Offsetting these obligations, it had cash of ₽317.8m as well as receivables valued at ₽1.44b due within 12 months. So it has liabilities totalling ₽8.92b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₽3.59b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Chelyabinsk Forge-and-Press Plant would likely require a major re-capitalisation if it had to pay its creditors today.

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

Chelyabinsk Forge-and-Press Plant's debt is 3.6 times its EBITDA, and its EBIT cover its interest expense 3.4 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. The good news is that Chelyabinsk Forge-and-Press Plant improved its EBIT by 9.4% over the last twelve months, thus gradually reducing its debt levels relative to its earnings. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Chelyabinsk Forge-and-Press Plant will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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. Considering the last three years, Chelyabinsk Forge-and-Press Plant actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

Mulling over Chelyabinsk Forge-and-Press Plant's attempt at staying on top of its total liabilities, we're certainly not enthusiastic. But at least it's pretty decent at growing its EBIT; that's encouraging. Overall, it seems to us that Chelyabinsk Forge-and-Press Plant's balance sheet is really quite a risk to the business. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. 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. Case in point: We've spotted 2 warning signs for Chelyabinsk Forge-and-Press Plant you should be aware of, and 1 of them is significant.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.
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