These 4 Measures Indicate That Federal Hydro-Generating Company - RusHydro (MCX:HYDR) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Public Joint-Stock Company Federal Hydro-Generating Company - RusHydro (MCX:HYDR) does carry debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

What Is Federal Hydro-Generating Company - RusHydro's Debt?

As you can see below, Federal Hydro-Generating Company - RusHydro had ₽196.7b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₽114.2b in cash, and so its net debt is ₽82.5b.

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

According to the last reported balance sheet, Federal Hydro-Generating Company - RusHydro had liabilities of ₽147.7b due within 12 months, and liabilities of ₽185.4b due beyond 12 months. Offsetting these obligations, it had cash of ₽114.2b as well as receivables valued at ₽46.6b due within 12 months. So it has liabilities totalling ₽172.2b more than its cash and near-term receivables, combined.

Federal Hydro-Generating Company - RusHydro has a market capitalization of ₽367.0b, so it could very likely raise cash to ameliorate 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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Federal Hydro-Generating Company - RusHydro has a low net debt to EBITDA ratio of only 0.69. And its EBIT easily covers its interest expense, being 249 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Another good sign is that Federal Hydro-Generating Company - RusHydro has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Federal Hydro-Generating Company - RusHydro 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.

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. Looking at the most recent three years, Federal Hydro-Generating Company - RusHydro recorded free cash flow of 23% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Happily, Federal Hydro-Generating Company - RusHydro's impressive interest cover implies it has the upper hand on its debt. But truth be told we feel its conversion of EBIT to free cash flow does undermine this impression a bit. We would also note that Electric Utilities industry companies like Federal Hydro-Generating Company - RusHydro commonly do use debt without problems. Looking at all the aforementioned factors together, it strikes us that Federal Hydro-Generating Company - RusHydro can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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 - Federal Hydro-Generating Company - RusHydro has 3 warning signs we think you should be aware of.

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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