The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Publichnoe Akcionernoe Obshestvo "Kostromskaya Sbytovaya Compania" (MCX:KTSB) does carry debt. But the real question is whether this debt is making the company risky.
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. 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.
What Is Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's Debt?
As you can see below, Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania had ₽190.7m of debt at September 2021, down from ₽469.1m a year prior. On the flip side, it has ₽94.0m in cash leading to net debt of about ₽96.6m.
A Look At Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's Liabilities
We can see from the most recent balance sheet that Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania had liabilities of ₽1.11b falling due within a year, and liabilities of ₽401.0k due beyond that. On the other hand, it had cash of ₽94.0m and ₽1.43b worth of receivables due within a year. So it can boast ₽416.4m more liquid assets than total liabilities.
This surplus liquidity suggests that Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master.
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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania has a low net debt to EBITDA ratio of only 0.32. And its EBIT covers its interest expense a whopping 18.7 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Also good is that Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania grew its EBIT at 19% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's free cash flow amounted to 46% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Happily, Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its level of total liabilities is also very heartening. We would also note that Electric Utilities industry companies like Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania commonly do use debt without problems. We think Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania is no more beholden to its lenders, than the birds are to birdwatchers. For investing nerds like us its balance sheet is almost charming. 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. Be aware that Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...
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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