Is Chelyabinsk plant of the profiled steel decking (MCX:PRFN) A Risky Investment?

Warren Buffett famously said, '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. Importantly, Public joint stock company "Chelyabinsk plant of the profiled steel decking" (MCX:PRFN) 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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Chelyabinsk plant of the profiled steel decking

What Is Chelyabinsk plant of the profiled steel decking's Net Debt?

As you can see below, at the end of June 2021, Chelyabinsk plant of the profiled steel decking had ₽1.51b of debt, up from ₽1.30b a year ago. Click the image for more detail. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Chelyabinsk plant of the profiled steel decking's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chelyabinsk plant of the profiled steel decking had liabilities of ₽2.19b due within 12 months and liabilities of ₽561.5m due beyond that. Offsetting these obligations, it had cash of ₽943.0k as well as receivables valued at ₽355.6m due within 12 months. So its liabilities total ₽2.40b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of ₽2.33b, we think shareholders really should watch Chelyabinsk plant of the profiled steel decking's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

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.

Chelyabinsk plant of the profiled steel decking shareholders face the double whammy of a high net debt to EBITDA ratio (5.3), and fairly weak interest coverage, since EBIT is just 1.3 times the interest expense. This means we'd consider it to have a heavy debt load. On a slightly more positive note, Chelyabinsk plant of the profiled steel decking grew its EBIT at 12% 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 you can't view debt in total isolation; since Chelyabinsk plant of the profiled steel decking 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last two years, Chelyabinsk plant of the profiled steel decking created free cash flow amounting to 9.5% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

To be frank both Chelyabinsk plant of the profiled steel decking's net debt to EBITDA and its track record of covering its interest expense with its EBIT make us rather uncomfortable with its debt levels. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. Overall, it seems to us that Chelyabinsk plant of the profiled steel decking's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Chelyabinsk plant of the profiled steel decking (including 1 which is a bit concerning) .

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.

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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