We believe Mordovia Energy Retail Company (MCX: MRSB) can stay on top of its debt
Legendary fund manager Li Lu (who Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, Mordovia Energy Retail Company Public limited company (MCX: MRSB) carries a debt. But does this debt concern shareholders?
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. By replacing dilution, however, debt can be a very good tool for companies 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 flow and debt together.
See our latest analysis for Mordovia Energy Retail Company
What is the debt of Mordovia Energy Retail Company?
You can click on the graph below for the historical figures, but it shows that Mordovia Energy Retail Company had a debt of 520.8 million yen in March 2021, down from 546.4 million yen a year earlier. On the other hand, it has 48.8M in liquidity, resulting in a net debt of around 472.0M.
How strong is Mordovia Energy Retail Company’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Mordovia Energy Retail Company had liabilities of 1.20 billion yen due within 12 months and liabilities of 2.18 million yen due beyond. In return, he had 48.8 million in cash and 915.6 million in receivables due within 12 months. Its liabilities therefore total 240.8 million more than the combination of its cash and short-term receivables.
Mordovia Energy Retail Company has a market cap of 570.3 million yen, so it could most likely raise funds to improve its balance sheet, should the need arise. But we absolutely want to keep our eyes open for indications that its debt is too risky.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Mordovia Energy Retail Company has a debt to EBITDA ratio of 3.0 and its EBIT has covered its interest expense 3.0 times. Overall, this implies that while we wouldn’t like to see debt levels rise, we believe it can handle its current leverage. The silver lining is that Mordovia Energy Retail Company increased its EBIT by 104% last year, which nurtures like idealism among the youth. If he can continue on this path, he will be able to deleverage with relative ease. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Mordovia Energy Retail Company will need revenue to repay this debt. So, if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.
Finally, a business can only repay its debts with hard cash, not with book profits. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Mordovia Energy Retail Company has actually generated more free cash flow than EBIT. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
Fortunately, Mordovia Energy Retail Company’s impressive conversion of EBIT to free cash flow means it has the upper hand over its debt. But the hard truth is that we are concerned about its coverage of interest. We would also like to note that companies in the electric utility sector like Mordovia Energy Retail Company generally use debt without a problem. When we consider the range of factors above, it seems that Mordovia Energy Retail Company is being fairly reasonable with its use of debt. While this carries some risk, it can also improve returns for shareholders. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. For example, Mordovia Energy Retail Company has 3 warning signs (and 2 which are a bit disturbing) we think you should know about.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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