Stock Analysis

These 4 Measures Indicate That Novorossiysk Commercial Sea Port (MCX:NMTP) Is Using Debt Reasonably Well

MISX:NMTP
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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.' 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 can see that Public Joint Stock Company Novorossiysk Commercial Sea Port (MCX:NMTP) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Novorossiysk Commercial Sea Port

How Much Debt Does Novorossiysk Commercial Sea Port Carry?

As you can see below, Novorossiysk Commercial Sea Port had US$590.4m of debt at March 2021, down from US$807.4m a year prior. On the flip side, it has US$279.0m in cash leading to net debt of about US$311.4m.

debt-equity-history-analysis
MISX:NMTP Debt to Equity History July 27th 2021

A Look At Novorossiysk Commercial Sea Port's Liabilities

The latest balance sheet data shows that Novorossiysk Commercial Sea Port had liabilities of US$290.2m due within a year, and liabilities of US$759.4m falling due after that. Offsetting these obligations, it had cash of US$279.0m as well as receivables valued at US$55.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$715.0m.

This deficit isn't so bad because Novorossiysk Commercial Sea Port is worth US$1.85b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). 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).

Novorossiysk Commercial Sea Port has net debt of just 0.88 times EBITDA, indicating that it is certainly not a reckless borrower. And this view is supported by the solid interest coverage, with EBIT coming in at 8.4 times the interest expense over the last year. It is just as well that Novorossiysk Commercial Sea Port's load is not too heavy, because its EBIT was down 41% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Novorossiysk Commercial Sea Port can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the most recent three years, Novorossiysk Commercial Sea Port recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

Novorossiysk Commercial Sea Port's EBIT growth rate was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we thought its net debt to EBITDA was a positive. It's also worth noting that Novorossiysk Commercial Sea Port is in the Infrastructure industry, which is often considered to be quite defensive. Looking at all this data makes us feel a little cautious about Novorossiysk Commercial Sea Port's debt levels. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Novorossiysk Commercial Sea Port , and understanding them should be part of your investment process.

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. 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:NMTP

Novorossiysk Commercial Sea Port

Public Joint Stock Company Novorossiysk Commercial Sea Port, together with its subsidiaries, provides stevedoring, port, and sea vessel services in Russia.

Excellent balance sheet and fair value.

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