Inter RAO UES (MCX:IRAO) Has A Rock Solid 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 Inter RAO UES (MCX:IRAO) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Inter RAO UES

How Much Debt Does Inter RAO UES Carry?

The chart below, which you can click on for greater detail, shows that Inter RAO UES had ₽3.18b in debt in September 2020; about the same as the year before. But on the other hand it also has ₽281.8b in cash, leading to a ₽278.7b net cash position.

How Strong Is Inter RAO UES' Balance Sheet?

The latest balance sheet data shows that Inter RAO UES had liabilities of ₽103.9b due within a year, and liabilities of ₽106.4b falling due after that. On the other hand, it had cash of ₽281.8b and ₽86.2b worth of receivables due within a year. So it actually has ₽157.8b more liquid assets than total liabilities.

This surplus strongly suggests that Inter RAO UES has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Inter RAO UES boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Inter RAO UES if management cannot prevent a repeat of the 22% 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 Inter RAO UES'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Inter RAO UES produced sturdy free cash flow equating to 79% 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.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Inter RAO UES has net cash of ₽278.7b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₽65b, being 79% of its EBIT. So we don't think Inter RAO UES's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Inter RAO UES , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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