Yahoo Finance Is Interregional Distribution Grid Company of Urals (MCX:MRKU) A Risky Investment?
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Interregional Distribution Grid Company of Urals, Joint Stock Company (MCX:MRKU) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View 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 2019, Interregional Distribution Grid Company of Urals had RUруб15.9b of debt, up from RUруб11.6b a year ago. Click the image for more detail. However, it does have RUруб3.52b in cash offsetting this, leading to net debt of about RUруб12.3b.
A Look At Interregional Distribution Grid Company of Urals's Liabilities
According to the last reported balance sheet, Interregional Distribution Grid Company of Urals had liabilities of RUруб23.2b due within 12 months, and liabilities of RUруб16.7b due beyond 12 months. Offsetting these obligations, it had cash of RUруб3.52b as well as receivables valued at RUруб11.6b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RUруб24.8b.
The deficiency here weighs heavily on the RUруб14.9b 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 At the end of the day, Interregional Distribution Grid Company of Urals would probably need a major re-capitalization if its creditors were to demand repayment.
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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Looking at its net debt to EBITDA of 1.3 and interest cover of 4.5 times, it seems to us that Interregional Distribution Grid Company of Urals is probably using debt in a pretty reasonable way. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Shareholders should be aware that Interregional Distribution Grid Company of Urals's EBIT was down 49% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Interregional Distribution Grid Company of Urals'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, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Interregional Distribution Grid Company of Urals created free cash flow amounting to 2.2% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.
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. 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 Urals is in the Electric Utilities industry, which is often considered to be quite defensive. After considering the datapoints discussed, we think Interregional Distribution Grid Company of Urals has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. Given Interregional Distribution Grid Company of Urals has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
