Federal Hydro-Generating Company - RusHydro (MCX:HYDR) Has A Pretty Healthy Balance Sheet

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro (MCX:HYDR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Federal Hydro-Generating Company - RusHydro

How Much Debt Does Federal Hydro-Generating Company - RusHydro Carry?

The image below, which you can click on for greater detail, shows that Federal Hydro-Generating Company - RusHydro had debt of ₽179.9b at the end of June 2021, a reduction from ₽188.4b over a year. However, because it has a cash reserve of ₽107.6b, its net debt is less, at about ₽72.3b.

How Strong Is Federal Hydro-Generating Company - RusHydro's Balance Sheet?

We can see from the most recent balance sheet that Federal Hydro-Generating Company - RusHydro had liabilities of ₽164.9b falling due within a year, and liabilities of ₽169.3b due beyond that. On the other hand, it had cash of ₽107.6b and ₽54.8b worth of receivables due within a year. So it has liabilities totalling ₽171.8b more than its cash and near-term receivables, combined.

Federal Hydro-Generating Company - RusHydro has a market capitalization of ₽352.7b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

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

Federal Hydro-Generating Company - RusHydro has a low net debt to EBITDA ratio of only 0.62. And its EBIT covers its interest expense a whopping 67.1 times over. So we're pretty relaxed about its super-conservative use of debt. While Federal Hydro-Generating Company - RusHydro doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Federal Hydro-Generating Company - RusHydro's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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, Federal Hydro-Generating Company - RusHydro's free cash flow amounted to 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

When it comes to the balance sheet, the standout positive for Federal Hydro-Generating Company - RusHydro was the fact that it seems able to cover its interest expense with its EBIT confidently. However, our other observations weren't so heartening. For example, its conversion of EBIT to free cash flow makes us a little nervous about its debt. We would also note that Electric Utilities industry companies like Federal Hydro-Generating Company - RusHydro commonly do use debt without problems. When we consider all the elements mentioned above, it seems to us that Federal Hydro-Generating Company - RusHydro is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. 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 3 warning signs for Federal Hydro-Generating Company - RusHydro (of which 1 is significant!) you should know about.

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.

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.

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