Does Interregional Distribution Grid Company of Center and Volga Region (MCX:MRKP) Have A Healthy Balance Sheet?

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, Interregional Distribution Grid Company of Center and Volga Region, Public Joint Stock Company (MCX:MRKP) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Interregional Distribution Grid Company of Center and Volga Region

What Is Interregional Distribution Grid Company of Center and Volga Region's Net Debt?

As you can see below, at the end of June 2020, Interregional Distribution Grid Company of Center and Volga Region had ₽26.2b of debt, up from ₽24.0b a year ago. Click the image for more detail. However, it also had ₽868.3m in cash, and so its net debt is ₽25.4b.

A Look At Interregional Distribution Grid Company of Center and Volga Region's Liabilities

We can see from the most recent balance sheet that Interregional Distribution Grid Company of Center and Volga Region had liabilities of ₽19.8b falling due within a year, and liabilities of ₽33.0b due beyond that. On the other hand, it had cash of ₽868.3m and ₽26.6b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₽25.3b.

This deficit is considerable relative to its market capitalization of ₽27.1b, so it does suggest shareholders should keep an eye on Interregional Distribution Grid Company of Center and Volga Region's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Looking at its net debt to EBITDA of 1.4 and interest cover of 5.4 times, it seems to us that Interregional Distribution Grid Company of Center and Volga Region is probably using debt in a pretty reasonable way. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Importantly, Interregional Distribution Grid Company of Center and Volga Region's EBIT fell a jaw-dropping 34% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Interregional Distribution Grid Company of Center and Volga Region can strengthen its balance sheet over time. 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Interregional Distribution Grid Company of Center and Volga Region reported free cash flow worth 14% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

We'd go so far as to say Interregional Distribution Grid Company of Center and Volga Region's EBIT growth rate was disappointing. But on the bright side, its net debt to EBITDA is a good sign, and makes us more optimistic. It's also worth noting that Interregional Distribution Grid Company of Center and Volga Region is in the Electric Utilities industry, which is often considered to be quite defensive. We're quite clear that we consider Interregional Distribution Grid Company of Center and Volga Region to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. Take risks, for example - Interregional Distribution Grid Company of Center and Volga Region has 3 warning signs we think you should be aware of.

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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