These 4 Measures Indicate That Interregional Distribution Grid Company of Center and Volga Region (MCX:MRKP) Is Using Debt Extensively

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. We can see that Interregional Distribution Grid Company of Center and Volga Region, Public Joint Stock Company (MCX:MRKP) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.

See 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 Debt?

You can click the graphic below for the historical numbers, but it shows that Interregional Distribution Grid Company of Center and Volga Region had ₽24.7b of debt in March 2021, down from ₽26.6b, one year before. However, it also had ₽1.13b in cash, and so its net debt is ₽23.6b.

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

Zooming in on the latest balance sheet data, we can see that Interregional Distribution Grid Company of Center and Volga Region had liabilities of ₽29.3b due within 12 months and liabilities of ₽26.3b due beyond that. Offsetting this, it had ₽1.13b in cash and ₽16.3b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₽38.2b.

Given this deficit is actually higher than the company's market capitalization of ₽28.7b, we think shareholders really should watch Interregional Distribution Grid Company of Center and Volga Region's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Looking at its net debt to EBITDA of 1.2 and interest cover of 6.8 times, it seems to us that Interregional Distribution Grid Company of Center and Volga Region is probably using debt in a pretty reasonable way. So we'd recommend keeping a close eye on the impact financing costs are having on the business. The good news is that Interregional Distribution Grid Company of Center and Volga Region has increased its EBIT by 4.5% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. In the last three years, Interregional Distribution Grid Company of Center and Volga Region created free cash flow amounting to 11% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

We'd go so far as to say Interregional Distribution Grid Company of Center and Volga Region's level of total liabilities was disappointing. But on the bright side, its net debt to EBITDA is a good sign, and makes us more optimistic. We should also note that Electric Utilities industry companies like Interregional Distribution Grid Company of Center and Volga Region commonly do use debt without problems. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Interregional Distribution Grid Company of Center and Volga Region stock a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. 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. For example, we've discovered 1 warning sign for Interregional Distribution Grid Company of Center and Volga Region that you should be aware of before investing here.

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.

When trading Interregional Distribution Grid Company of Center and Volga Region or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.