Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Public Joint-stock Company "TNS energo Voronezh" (MCX:VRSB) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is TNS energo Voronezh's Debt?
The image below, which you can click on for greater detail, shows that TNS energo Voronezh had debt of ₽1.19b at the end of September 2021, a reduction from ₽1.64b over a year. However, it also had ₽626.9m in cash, and so its net debt is ₽560.6m.
How Healthy Is TNS energo Voronezh's Balance Sheet?
According to the balance sheet data, TNS energo Voronezh had liabilities of ₽3.51b due within 12 months, but no longer term liabilities. On the other hand, it had cash of ₽626.9m and ₽2.22b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₽670.4m.
Given TNS energo Voronezh has a market capitalization of ₽8.70b, 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.
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). 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).
TNS energo Voronezh's net debt is sitting at a very reasonable 1.6 times its EBITDA, while its EBIT covered its interest expense just 3.3 times last year. While these numbers do not alarm us, it's worth noting that the cost of the company's debt is having a real impact. Pleasingly, TNS energo Voronezh is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 201% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is TNS energo Voronezh's earnings that will influence how the balance sheet holds up in the future. 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. In the last two years, TNS energo Voronezh's free cash flow amounted to 44% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
The good news is that TNS energo Voronezh's demonstrated ability to grow its EBIT delights us like a fluffy puppy does a toddler. But truth be told we feel its interest cover does undermine this impression a bit. It's also worth noting that TNS energo Voronezh is in the Electric Utilities industry, which is often considered to be quite defensive. Taking all this data into account, it seems to us that TNS energo Voronezh takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with TNS energo Voronezh , 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.
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.