Does Magnitogorsk Iron & Steel Works (MCX:MAGN) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Public Joint Stock Company Magnitogorsk Iron & Steel Works (MCX:MAGN) does carry debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Magnitogorsk Iron & Steel Works

What Is Magnitogorsk Iron & Steel Works's Net Debt?

As you can see below, at the end of December 2020, Magnitogorsk Iron & Steel Works had US$959.0m of debt, up from US$860.0m a year ago. Click the image for more detail. But on the other hand it also has US$1.07b in cash, leading to a US$106.0m net cash position.

How Healthy Is Magnitogorsk Iron & Steel Works' Balance Sheet?

We can see from the most recent balance sheet that Magnitogorsk Iron & Steel Works had liabilities of US$1.83b falling due within a year, and liabilities of US$1.07b due beyond that. Offsetting these obligations, it had cash of US$1.07b as well as receivables valued at US$589.0m due within 12 months. So its liabilities total US$1.24b more than the combination of its cash and short-term receivables.

Given Magnitogorsk Iron & Steel Works has a market capitalization of US$7.86b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Magnitogorsk Iron & Steel Works also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Magnitogorsk Iron & Steel Works's EBIT dived 11%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Magnitogorsk Iron & Steel Works can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Magnitogorsk Iron & Steel Works may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Magnitogorsk Iron & Steel Works produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

Although Magnitogorsk Iron & Steel Works's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$106.0m. So we are not troubled with Magnitogorsk Iron & Steel Works's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Magnitogorsk Iron & Steel Works that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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