These 4 Measures Indicate That Interregional Distribution Grid Company of Urals (MCX:MRKU) Is Using Debt In A Risky Way

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Interregional Distribution Grid Company of Urals, Joint Stock Company (MCX:MRKU) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Interregional Distribution Grid Company of Urals

What Is Interregional Distribution Grid Company of Urals's Debt?

As you can see below, at the end of March 2021, Interregional Distribution Grid Company of Urals had ₽20.5b of debt, up from ₽17.2b a year ago. Click the image for more detail. On the flip side, it has ₽1.74b in cash leading to net debt of about ₽18.8b.

A Look At Interregional Distribution Grid Company of Urals' Liabilities

According to the last reported balance sheet, Interregional Distribution Grid Company of Urals had liabilities of ₽18.1b due within 12 months, and liabilities of ₽28.4b due beyond 12 months. On the other hand, it had cash of ₽1.74b and ₽7.28b worth of receivables due within a year. So it has liabilities totalling ₽37.4b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₽12.6b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Interregional Distribution Grid Company of Urals would likely require a major re-capitalisation if it had to pay its creditors today.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Even though Interregional Distribution Grid Company of Urals's debt is only 2.0, its interest cover is really very low at 2.2. The main reason for this is that it has such high depreciation and amortisation. While companies often boast that these charges are non-cash, most such businesses will therefore require ongoing investment (that is not expensed.) In any case, it's safe to say the company has meaningful debt. Importantly, Interregional Distribution Grid Company of Urals's EBIT fell a jaw-dropping 41% 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 Urals 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 Urals saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Interregional Distribution Grid Company of Urals's EBIT growth rate left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least its net debt to EBITDA is not so bad. We should also note that Electric Utilities industry companies like Interregional Distribution Grid Company of Urals commonly do use debt without problems. We think the chances that Interregional Distribution Grid Company of Urals has too much debt a very significant. To our minds, that means the stock is rather high risk, and probably one to avoid; but to each their own (investing) style. 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. We've identified 3 warning signs with Interregional Distribution Grid Company of Urals (at least 2 which are significant) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you’re looking to trade Interregional Distribution Grid Company of Urals, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.