Does Novorossyisk Grain Plant (MCX:NKHP) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Public Joint Stock Company Novorossyisk Grain Plant (MCX:NKHP) 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?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Novorossyisk Grain Plant

How Much Debt Does Novorossyisk Grain Plant Carry?

The image below, which you can click on for greater detail, shows that Novorossyisk Grain Plant had debt of ₽1.72b at the end of September 2021, a reduction from ₽3.74b over a year. On the flip side, it has ₽1.58b in cash leading to net debt of about ₽141.2m.

How Healthy Is Novorossyisk Grain Plant's Balance Sheet?

According to the last reported balance sheet, Novorossyisk Grain Plant had liabilities of ₽2.23b due within 12 months, and liabilities of ₽988.6m due beyond 12 months. Offsetting these obligations, it had cash of ₽1.58b as well as receivables valued at ₽252.1m due within 12 months. So its liabilities total ₽1.39b more than the combination of its cash and short-term receivables.

Of course, Novorossyisk Grain Plant has a market capitalization of ₽15.5b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, Novorossyisk Grain Plant has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Novorossyisk Grain Plant has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.034 and EBIT of 52.3 times the interest expense. So relative to past earnings, the debt load seems trivial. Better yet, Novorossyisk Grain Plant grew its EBIT by 131% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Novorossyisk Grain Plant'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, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Novorossyisk Grain Plant's free cash flow amounted to 50% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

The good news is that Novorossyisk Grain Plant's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its EBIT growth rate also supports that impression! It's also worth noting that Novorossyisk Grain Plant is in the Infrastructure industry, which is often considered to be quite defensive. Considering this range of factors, it seems to us that Novorossyisk Grain Plant is quite prudent with its debt, and the risks seem well managed. So we're not worried about the use of a little leverage on the balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Novorossyisk Grain Plant that you should be aware of before investing here.

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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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.