Does Krasnyj Octyabr (MCX:KROT) Have A Healthy Balance Sheet?

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.' 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. We note that Public Joint-Stock Company Krasnyj Octyabr (MCX:KROT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Krasnyj Octyabr

How Much Debt Does Krasnyj Octyabr Carry?

As you can see below, at the end of December 2020, Krasnyj Octyabr had ₽483.7m of debt, up from ₽286.6m a year ago. Click the image for more detail. However, because it has a cash reserve of ₽125.0m, its net debt is less, at about ₽358.7m.

How Healthy Is Krasnyj Octyabr's Balance Sheet?

We can see from the most recent balance sheet that Krasnyj Octyabr had liabilities of ₽3.26b falling due within a year, and liabilities of ₽970.7m due beyond that. Offsetting these obligations, it had cash of ₽125.0m as well as receivables valued at ₽4.63b due within 12 months. So it can boast ₽530.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Krasnyj Octyabr could probably pay off its debt with ease, as its balance sheet is far from stretched. When analysing debt levels, the balance sheet is the obvious place to start. But it is Krasnyj Octyabr'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 Krasnyj Octyabr had a loss before interest and tax, and actually shrunk its revenue by 3.0%, to ₽14b. We would much prefer see growth.

Caveat Emptor

Importantly, Krasnyj Octyabr had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₽282m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. So it seems too risky for our taste. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Krasnyj Octyabr is showing 2 warning signs in our investment analysis , and 1 of those 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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