Does Federal Grid Company of Unified Energy System (MCX:FEES) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. As with many other companies Public Joint-Stock Company Federal Grid Company of Unified Energy System (MCX:FEES) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for Federal Grid Company of Unified Energy System

How Much Debt Does Federal Grid Company of Unified Energy System Carry?

The chart below, which you can click on for greater detail, shows that Federal Grid Company of Unified Energy System had ₽221.9b in debt in September 2020; about the same as the year before. On the flip side, it has ₽57.6b in cash leading to net debt of about ₽164.4b.

A Look At Federal Grid Company of Unified Energy System's Liabilities

We can see from the most recent balance sheet that Federal Grid Company of Unified Energy System had liabilities of ₽67.6b falling due within a year, and liabilities of ₽306.3b due beyond that. On the other hand, it had cash of ₽57.6b and ₽52.8b worth of receivables due within a year. So its liabilities total ₽263.5b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₽266.9b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Federal Grid Company of Unified Energy System's net debt is only 1.2 times its EBITDA. And its EBIT easily covers its interest expense, being 2k times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. But the other side of the story is that Federal Grid Company of Unified Energy System saw its EBIT decline by 8.2% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Federal Grid Company of Unified Energy System can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, Federal Grid Company of Unified Energy System recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Federal Grid Company of Unified Energy System's level of total liabilities and EBIT growth rate definitely weigh on it, in our esteem. But the good news is it seems to be able to cover its interest expense with its EBIT with ease. We should also note that Electric Utilities industry companies like Federal Grid Company of Unified Energy System commonly do use debt without problems. When we consider all the factors discussed, it seems to us that Federal Grid Company of Unified Energy System is taking some risks with its use of debt. While that debt can boost returns, we think the company has enough leverage now. 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 example, we've discovered 1 warning sign for Federal Grid Company of Unified Energy System that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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