These 4 Measures Indicate That Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania (MCX:KTSB) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 should shareholders be worried about its use of debt?

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania

How Much Debt Does Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania Carry?

The image below, which you can click on for greater detail, shows that Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania had debt of ₽469.1m at the end of September 2020, a reduction from ₽640.4m over a year. However, because it has a cash reserve of ₽21.4m, its net debt is less, at about ₽447.7m.

How Healthy Is Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's Balance Sheet?

We can see from the most recent balance sheet that Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania had liabilities of ₽1.31b falling due within a year, and liabilities of ₽301.0k due beyond that. Offsetting these obligations, it had cash of ₽21.4m as well as receivables valued at ₽1.66b due within 12 months. So it actually has ₽375.9m 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. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania has net debt worth 1.7 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 6.2 times the interest expense. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden. Importantly, Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania grew its EBIT by 37% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Happily, Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania's impressive EBIT growth rate implies it has the upper hand on its debt. And the good news does not stop there, as its level of total liabilities also supports that impression! It's also worth noting that Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania is in the Electric Utilities industry, which is often considered to be quite defensive. We think Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania is no more beholden to its lenders, than the birds are to birdwatchers. To our minds it has a healthy happy balance sheet. 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. For instance, we've identified 2 warning signs for Publichnoe Akcionernoe Obshestvo Kostromskaya Sbytovaya Compania (1 is concerning) 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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