Stock Analysis

We Think Novorossiysk Commercial Sea Port (MCX:NMTP) Can Stay On Top Of Its Debt

MISX:NMTP
Source: Shutterstock

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Novorossiysk Commercial Sea Port (MCX:NMTP) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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.

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$478.4m of debt at June 2021, down from US$703.9m a year prior. On the flip side, it has US$253.5m in cash leading to net debt of about US$224.8m.

debt-equity-history-analysis
MISX:NMTP Debt to Equity History October 29th 2021

How Strong Is Novorossiysk Commercial Sea Port's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Novorossiysk Commercial Sea Port had liabilities of US$312.2m due within 12 months and liabilities of US$662.6m due beyond that. On the other hand, it had cash of US$253.5m and US$51.1m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$670.2m.

While this might seem like a lot, it is not so bad since Novorossiysk Commercial Sea Port has a market capitalization of US$2.02b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With net debt sitting at just 0.60 times EBITDA, Novorossiysk Commercial Sea Port is arguably pretty conservatively geared. And this view is supported by the solid interest coverage, with EBIT coming in at 9.6 times the interest expense over the last year. The modesty of its debt load may become crucial for Novorossiysk Commercial Sea Port if management cannot prevent a repeat of the 31% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Novorossiysk Commercial Sea Port's ability to maintain a healthy balance sheet going forward. 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 it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Novorossiysk Commercial Sea Port produced sturdy free cash flow equating to 63% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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. There's no doubt that its ability to handle its debt, based on its EBITDA, is pretty flash. It's also worth noting that Novorossiysk Commercial Sea Port is in the Infrastructure industry, which is often considered to be quite defensive. When we consider all the factors mentioned above, we do feel a bit cautious about Novorossiysk Commercial Sea Port's use of debt. 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Novorossiysk Commercial Sea Port (of which 1 is a bit unpleasant!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Valuation is complex, but we're helping make it simple.

Find out whether Novorossiysk Commercial Sea Port is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Stock Analysis

No articles found