These 4 Measures Indicate That Slavneft-Yaroslavnefteorgsintez (MCX:JNOS) Is Using Debt Extensively

By
Simply Wall St
Published
December 29, 2020
MISX:JNOS

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. As with many other companies Public Joint Stock Company Slavneft-Yaroslavnefteorgsintez (MCX:JNOS) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Slavneft-Yaroslavnefteorgsintez

How Much Debt Does Slavneft-Yaroslavnefteorgsintez Carry?

As you can see below, at the end of June 2020, Slavneft-Yaroslavnefteorgsintez had ₽31.5b of debt, up from ₽19.2b a year ago. Click the image for more detail. And it doesn't have much cash, so its net debt is about the same.

debt-equity-history-analysis
MISX:JNOS Debt to Equity History December 29th 2020

How Healthy Is Slavneft-Yaroslavnefteorgsintez's Balance Sheet?

We can see from the most recent balance sheet that Slavneft-Yaroslavnefteorgsintez had liabilities of ₽19.0b falling due within a year, and liabilities of ₽30.2b due beyond that. Offsetting this, it had ₽212.0m in cash and ₽14.8b in receivables that were due within 12 months. So it has liabilities totalling ₽34.1b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₽21.1b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Slavneft-Yaroslavnefteorgsintez would probably need a major re-capitalization if its creditors were to demand repayment.

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.

Slavneft-Yaroslavnefteorgsintez's net debt to EBITDA ratio of about 2.0 suggests only moderate use of debt. And its commanding EBIT of 1k times its interest expense, implies the debt load is as light as a peacock feather. Sadly, Slavneft-Yaroslavnefteorgsintez's EBIT actually dropped 6.4% in the last year. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. There's no doubt that we learn most about debt from the balance sheet. But it is Slavneft-Yaroslavnefteorgsintez's earnings that will influence how the balance sheet holds up in the future. 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 it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Slavneft-Yaroslavnefteorgsintez reported free cash flow worth 19% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

Mulling over Slavneft-Yaroslavnefteorgsintez's attempt at staying on top of its total liabilities, we're certainly not enthusiastic. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. We're quite clear that we consider Slavneft-Yaroslavnefteorgsintez to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Slavneft-Yaroslavnefteorgsintez , and understanding them should be part of your investment process.

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.

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This article by Simply Wall St is general in nature. 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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