Slavneft-Megionneftegas (MCX:MFGS) Has Debt But No Earnings; Should You Worry?

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. Importantly, Joint-stock company Slavneft-Megionneftegas (MCX:MFGS) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 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 Slavneft-Megionneftegas

What Is Slavneft-Megionneftegas's Net Debt?

As you can see below, Slavneft-Megionneftegas had ₽44.7b of debt at June 2021, down from ₽47.4b a year prior. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is Slavneft-Megionneftegas' Balance Sheet?

The latest balance sheet data shows that Slavneft-Megionneftegas had liabilities of ₽43.6b due within a year, and liabilities of ₽65.5b falling due after that. Offsetting this, it had ₽306.0m in cash and ₽56.9b in receivables that were due within 12 months. So it has liabilities totalling ₽51.9b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₽47.5b, we think shareholders really should watch Slavneft-Megionneftegas's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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.

Over 12 months, Slavneft-Megionneftegas made a loss at the EBIT level, and saw its revenue drop to ₽73b, which is a fall of 61%. 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). To be specific the EBIT loss came in at ₽269m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of ₽1.7b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Slavneft-Megionneftegas you should know about.

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.

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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