Here's Why Interregional Distribution Grid Company of the North-West (MCX:MRKZ) Is Weighed Down By Its Debt Load

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 note that Public Joint-Stock Company Interregional Distribution Grid Company of the North-West (MCX:MRKZ) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Interregional Distribution Grid Company of the North-West

What Is Interregional Distribution Grid Company of the North-West's Net Debt?

As you can see below, Interregional Distribution Grid Company of the North-West had ₽14.4b of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₽844.9m in cash, and so its net debt is ₽13.5b.

How Healthy Is Interregional Distribution Grid Company of the North-West's Balance Sheet?

According to the last reported balance sheet, Interregional Distribution Grid Company of the North-West had liabilities of ₽19.0b due within 12 months, and liabilities of ₽10.1b due beyond 12 months. Offsetting these obligations, it had cash of ₽844.9m as well as receivables valued at ₽5.53b due within 12 months. So it has liabilities totalling ₽22.8b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₽5.46b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Interregional Distribution Grid Company of the North-West would likely require a major re-capitalisation if it had to pay its creditors today.

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.

While we wouldn't worry about Interregional Distribution Grid Company of the North-West's net debt to EBITDA ratio of 2.6, we think its super-low interest cover of 0.83 times is a sign of high leverage. It seems that the business incurs large depreciation and amortisation charges, so maybe its debt load is heavier than it would first appear, since EBITDA is arguably a generous measure of earnings. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. Even worse, Interregional Distribution Grid Company of the North-West saw its EBIT tank 72% over the last 12 months. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Interregional Distribution Grid Company of the North-West's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 the North-West barely recorded positive free cash flow, in total. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.

Our View

On the face of it, Interregional Distribution Grid Company of the North-West'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. Having said that, its ability handle its debt, based on its EBITDA, isn't such a worry. It's also worth noting that Interregional Distribution Grid Company of the North-West is in the Electric Utilities industry, which is often considered to be quite defensive. Considering all the factors previously mentioned, we think that Interregional Distribution Grid Company of the North-West really is carrying too much debt. To us, that makes the stock rather risky, like walking through a dog park with your eyes closed. But some investors may feel differently. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Interregional Distribution Grid Company of the North-West , and understanding them should be part of your investment process.

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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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.
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