Solikamsk magnesium works (MCX:MGNZ) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Open joint stock company Solikamsk magnesium works (MCX:MGNZ) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Solikamsk magnesium works

How Much Debt Does Solikamsk magnesium works Carry?

The chart below, which you can click on for greater detail, shows that Solikamsk magnesium works had ₽287.0m in debt in December 2020; about the same as the year before. But it also has ₽414.8m in cash to offset that, meaning it has ₽127.8m net cash.

How Strong Is Solikamsk magnesium works' Balance Sheet?

We can see from the most recent balance sheet that Solikamsk magnesium works had liabilities of ₽1.64b falling due within a year, and liabilities of ₽314.0m due beyond that. On the other hand, it had cash of ₽414.8m and ₽433.7m worth of receivables due within a year. So it has liabilities totalling ₽1.11b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Solikamsk magnesium works is worth ₽3.80b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Solikamsk magnesium works boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Solikamsk magnesium works's load is not too heavy, because its EBIT was down 23% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Solikamsk magnesium works will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Solikamsk magnesium 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. Over the most recent three years, Solikamsk magnesium works recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While Solikamsk magnesium works does have more liabilities than liquid assets, it also has net cash of ₽127.8m. So we don't have any problem with Solikamsk magnesium works's use of debt. 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. For instance, we've identified 2 warning signs for Solikamsk magnesium works that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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