Inter RAO UES (MCX:IRAO) Has A Rock Solid Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Public Joint Stock Company Inter RAO UES (MCX:IRAO) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Inter RAO UES

What Is Inter RAO UES's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Inter RAO UES had ₽3.05b of debt in December 2020, down from ₽3.32b, one year before. However, its balance sheet shows it holds ₽329.8b in cash, so it actually has ₽326.7b net cash.

How Healthy Is Inter RAO UES' Balance Sheet?

The latest balance sheet data shows that Inter RAO UES had liabilities of ₽140.5b due within a year, and liabilities of ₽108.6b falling due after that. Offsetting this, it had ₽329.8b in cash and ₽90.6b in receivables that were due within 12 months. So it can boast ₽171.3b 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. 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 21% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Over the last three years, Inter RAO UES recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Inter RAO UES has ₽326.7b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₽73b, being 83% 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. Be aware that Inter RAO UES is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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