Is Slavneft-Megionneftegas (MCX:MFGS) Using Too Much Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Joint-stock company Slavneft-Megionneftegas (MCX:MFGS) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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-Megionneftegas

What Is Slavneft-Megionneftegas's Debt?

You can click the graphic below for the historical numbers, but it shows that Slavneft-Megionneftegas had ₽43.6b of debt in December 2020, down from ₽49.6b, one year before. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Slavneft-Megionneftegas' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Slavneft-Megionneftegas had liabilities of ₽30.5b due within 12 months and liabilities of ₽68.3b due beyond that. On the other hand, it had cash of ₽485.0m and ₽43.8b worth of receivables due within a year. So its liabilities total ₽54.6b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of ₽41.9b, we think shareholders really should watch Slavneft-Megionneftegas's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Slavneft-Megionneftegas's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Slavneft-Megionneftegas had a loss before interest and tax, and actually shrunk its revenue by 60%, to ₽74b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Slavneft-Megionneftegas's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₽11b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of ₽2.3b over the last twelve months. So suffice it to say we consider the stock to be risky. 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 1 warning sign for Slavneft-Megionneftegas 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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