Stock Analysis

We Think Moscow City Telephone Network (MCX:MGTS) Can Stay On Top Of Its Debt

MISX:MGTS
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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Public Joint Stock Company Moscow City Telephone Network (MCX:MGTS) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Moscow City Telephone Network

How Much Debt Does Moscow City Telephone Network Carry?

You can click the graphic below for the historical numbers, but it shows that Moscow City Telephone Network had ₽1.26b of debt in December 2020, down from ₽1.49b, one year before. But on the other hand it also has ₽4.83b in cash, leading to a ₽3.56b net cash position.

debt-equity-history-analysis
MISX:MGTS Debt to Equity History April 1st 2021

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

According to the last reported balance sheet, Moscow City Telephone Network had liabilities of ₽20.1b due within 12 months, and liabilities of ₽18.3b due beyond 12 months. Offsetting this, it had ₽4.83b in cash and ₽9.92b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₽23.7b.

Of course, Moscow City Telephone Network has a market capitalization of ₽184.9b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Moscow City Telephone Network boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Moscow City Telephone Network has seen its EBIT plunge 10% in the last twelve months. 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 you can't view debt in total isolation; since Moscow City Telephone Network will need earnings to service that debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. While Moscow City Telephone Network has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. 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

Although Moscow City Telephone Network's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₽3.56b. And it impressed us with free cash flow of ₽12b, being 110% of its EBIT. So we don't have any problem with Moscow City Telephone Network's use of debt. 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 Moscow City Telephone Network you should know about.

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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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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About MISX:MGTS

Moscow City Telephone Network

Public Joint Stock Company Moscow City Telephone Network provides telecommunications services in Russia and rest of Europe.

Excellent balance sheet with acceptable track record.