Does TNS energo Nizhny Novgorod (MCX:NNSB) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Public Joint-Stock Company TNS energo Nizhny Novgorod (MCX:NNSB) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for TNS energo Nizhny Novgorod

How Much Debt Does TNS energo Nizhny Novgorod Carry?

As you can see below, TNS energo Nizhny Novgorod had ₽4.60b of debt at June 2020, down from ₽4.90b a year prior. However, it also had ₽930.7m in cash, and so its net debt is ₽3.67b.

A Look At TNS energo Nizhny Novgorod's Liabilities

According to the last reported balance sheet, TNS energo Nizhny Novgorod had liabilities of ₽19.4b due within 12 months, and liabilities of ₽455.9m due beyond 12 months. On the other hand, it had cash of ₽930.7m and ₽18.3b worth of receivables due within a year. So it has liabilities totalling ₽585.5m more than its cash and near-term receivables, combined.

Given TNS energo Nizhny Novgorod has a market capitalization of ₽10.2b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Weak interest cover of 0.22 times and a disturbingly high net debt to EBITDA ratio of 31.4 hit our confidence in TNS energo Nizhny Novgorod like a one-two punch to the gut. The debt burden here is substantial. Even worse, TNS energo Nizhny Novgorod saw its EBIT tank 79% 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. 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 Nizhny Novgorod 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.

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 two years, TNS energo Nizhny Novgorod saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

On the face of it, TNS energo Nizhny Novgorod's conversion of EBIT to free cash flow left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at staying on top of its total liabilities; that's encouraging. It's also worth noting that TNS energo Nizhny Novgorod is in the Electric Utilities industry, which is often considered to be quite defensive. We're quite clear that we consider TNS energo Nizhny Novgorod to be really rather risky, as a result of its balance sheet health. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - TNS energo Nizhny Novgorod has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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