Is Magnitogorsk Iron & Steel Works (MCX:MAGN) A Risky Investment?

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.' 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. We note that Public Joint Stock Company Magnitogorsk Iron & Steel Works (MCX:MAGN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. 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.

View our latest analysis for Magnitogorsk Iron & Steel Works

How Much Debt Does Magnitogorsk Iron & Steel Works Carry?

The image below, which you can click on for greater detail, shows that at March 2021 Magnitogorsk Iron & Steel Works had debt of US$946.0m, up from US$888.0m in one year. However, it does have US$817.0m in cash offsetting this, leading to net debt of about US$129.0m.

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

The latest balance sheet data shows that Magnitogorsk Iron & Steel Works had liabilities of US$1.41b due within a year, and liabilities of US$1.04b falling due after that. Offsetting these obligations, it had cash of US$817.0m as well as receivables valued at US$847.0m due within 12 months. So it has liabilities totalling US$793.0m more than its cash and near-term receivables, combined.

Of course, Magnitogorsk Iron & Steel Works has a market capitalization of US$9.14b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Magnitogorsk Iron & Steel Works has virtually no net debt, so it's fair to say it does not have a heavy debt load!

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With debt at a measly 0.07 times EBITDA and EBIT covering interest a whopping 91.9 times, it's clear that Magnitogorsk Iron & Steel Works is not a desperate borrower. So relative to past earnings, the debt load seems trivial. Also good is that Magnitogorsk Iron & Steel Works grew its EBIT at 15% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Magnitogorsk Iron & Steel Works's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Magnitogorsk Iron & Steel Works produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Happily, Magnitogorsk Iron & Steel Works's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its net debt to EBITDA also supports that impression! Zooming out, Magnitogorsk Iron & Steel Works seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. 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 Magnitogorsk Iron & Steel Works 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.

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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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