Inter RAO UES (MCX:IRAO) Could Easily Take On More Debt

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.' 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 Inter RAO UES (MCX:IRAO) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Inter RAO UES

How Much Debt Does Inter RAO UES Carry?

As you can see below, Inter RAO UES had ₽2.91b of debt at March 2021, down from ₽3.17b a year prior. However, its balance sheet shows it holds ₽337.8b in cash, so it actually has ₽334.9b net cash.

How Healthy Is Inter RAO UES' Balance Sheet?

The latest balance sheet data shows that Inter RAO UES had liabilities of ₽124.5b due within a year, and liabilities of ₽108.7b falling due after that. On the other hand, it had cash of ₽337.8b and ₽98.1b worth of receivables due within a year. So it actually has ₽202.7b more liquid assets than total liabilities.

This excess liquidity is a great indication that Inter RAO UES' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Inter RAO UES boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Inter RAO UES saw its EBIT drop by 6.5% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Inter RAO UES 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Inter RAO UES has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Inter RAO UES recorded free cash flow worth 79% 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.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Inter RAO UES has net cash of ₽334.9b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₽62b, being 79% of its EBIT. So we don't think Inter RAO UES's use of debt is risky. 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 2 warning signs for Inter RAO UES (of which 1 doesn't sit too well with us!) you should know about.

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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