Is Moscow City Telephone Network (MCX:MGTS) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that Public Joint Stock Company Moscow City Telephone Network (MCX:MGTS) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Moscow City Telephone Network

How Much Debt Does Moscow City Telephone Network Carry?

The image below, which you can click on for greater detail, shows that Moscow City Telephone Network had debt of ₽1.32b at the end of June 2021, a reduction from ₽1.61b over a year. However, it does have ₽15.9b in cash offsetting this, leading to net cash of ₽14.6b.

How Strong Is Moscow City Telephone Network's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Moscow City Telephone Network had liabilities of ₽19.8b due within 12 months and liabilities of ₽17.5b due beyond that. On the other hand, it had cash of ₽15.9b and ₽12.0b worth of receivables due within a year. So it has liabilities totalling ₽9.37b more than its cash and near-term receivables, combined.

Since publicly traded Moscow City Telephone Network shares are worth a total of ₽162.6b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Moscow City Telephone Network also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Moscow City Telephone Network grew its EBIT at 11% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Moscow City Telephone Network'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Moscow City Telephone Network 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 last three years, Moscow City Telephone Network actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Moscow City Telephone Network has ₽14.6b in net cash. And it impressed us with free cash flow of ₽11b, being 101% of its EBIT. So is Moscow City Telephone Network's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Moscow City Telephone Network that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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