These 4 Measures Indicate That TNS energo Nizhny Novgorod (MCX:NNSB) Is Using Debt Reasonably Well

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 Public Joint-Stock Company TNS energo Nizhny Novgorod (MCX:NNSB) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for TNS energo Nizhny Novgorod

How Much Debt Does TNS energo Nizhny Novgorod Carry?

The chart below, which you can click on for greater detail, shows that TNS energo Nizhny Novgorod had ₽5.13b in debt in September 2021; about the same as the year before. However, it also had ₽904.7m in cash, and so its net debt is ₽4.22b.

A Look At TNS energo Nizhny Novgorod's Liabilities

Zooming in on the latest balance sheet data, we can see that TNS energo Nizhny Novgorod had liabilities of ₽21.0b due within 12 months and liabilities of ₽509.4m due beyond that. On the other hand, it had cash of ₽904.7m and ₽20.2b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Of course, TNS energo Nizhny Novgorod has a market capitalization of ₽4.72b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

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 TNS energo Nizhny Novgorod's net debt to EBITDA ratio of 3.4, we think its super-low interest cover of 2.5 times is a sign of high leverage. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. However, it should be some comfort for shareholders to recall that TNS energo Nizhny Novgorod actually grew its EBIT by a hefty 120%, over the last 12 months. If it can keep walking that path it will be in a position to shed its debt with relative ease. There's no doubt that we learn most about debt from the balance sheet. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last two years, TNS energo Nizhny Novgorod reported free cash flow worth 20% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

When it comes to the balance sheet, the standout positive for TNS energo Nizhny Novgorod was the fact that it seems able to grow its EBIT confidently. But the other factors we noted above weren't so encouraging. To be specific, it seems about as good at covering its interest expense with its EBIT as wet socks are at keeping your feet warm. We would also note that Electric Utilities industry companies like TNS energo Nizhny Novgorod commonly do use debt without problems. Considering this range of data points, we think TNS energo Nizhny Novgorod is in a good position to manage its debt levels. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. For instance, we've identified 5 warning signs for TNS energo Nizhny Novgorod (2 make us uncomfortable) you should be aware of.

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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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.