Here's Why TNS energo Mari El (MCX:MISB) Can Afford Some Debt

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.' 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. As with many other companies Public Joint-stock Company TNS energo Mari El (MCX:MISB) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for TNS energo Mari El

How Much Debt Does TNS energo Mari El Carry?

As you can see below, TNS energo Mari El had ₽865.8m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. Net debt is about the same, since the it doesn't have much cash.

How Strong Is TNS energo Mari El's Balance Sheet?

We can see from the most recent balance sheet that TNS energo Mari El had liabilities of ₽1.60b falling due within a year, and liabilities of ₽275.0m due beyond that. Offsetting these obligations, it had cash of ₽12.1m as well as receivables valued at ₽1.16b due within 12 months. So it has liabilities totalling ₽699.1m more than its cash and near-term receivables, combined.

This deficit isn't so bad because TNS energo Mari El is worth ₽1.56b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since TNS energo Mari El will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, TNS energo Mari El reported revenue of ₽8.2b, which is a gain of 3.7%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, TNS energo Mari El had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₽3.1m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of ₽15m and a profit of ₽69m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for TNS energo Mari El (2 shouldn't be ignored) 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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