Does Rosseti Volga (MCX: MRKV) use too much debt?

David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Above all, Public joint stock company Rosseti Volga (MCX: MRKV) bears the debt. But should shareholders be concerned about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first thing to do on how to file bankruptcy when considering how much debt a business uses is to look at its cash flow and debt together.

Check out our latest analysis for Rosseti Volga

What is Rosseti Volga’s debt?

You can click on the graph below for historical figures, but it shows that as of September 2020 Rosseti Volga had 6.68 billion yen in debt, an increase from 3.38 billion yen, on a year. However, given that it has a cash reserve of 724.2 million yen, its net debt is less, at around 5.96 billion yen.

MISX: MRKV History of debt to equity March 11, 2021

How healthy is Rosseti Volga’s record?

Zooming in on the latest balance sheet data, we can see that Rosseti Volga had ₽7.82b liabilities due within 12 months and ₽13.6b liabilities beyond. On the other hand, he had 724.2 million yen in cash and 6.02 billion yen in receivables due within one year. It therefore has liabilities totaling 14.6 billion yen more than its cash and short-term receivables combined.

Given that this deficit is actually greater than the company’s market cap of 12.5 billion yen, we believe shareholders should really watch Rosseti Volga’s debt levels, like a parent watching their child do. cycling for the first time. Hypothetically, extremely high dilution would be required if the company were forced to repay its debts by raising capital at the current share price.

We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Rosseti Volga has a net debt of only 1.0 times EBITDA, indicating that he is certainly not a reckless borrower. And it has 8.0 times interest coverage, which is more than enough. In fact, Rosseti Volga’s saving grace lies in its low level of debt, as its EBIT has fallen by 75% in the last twelve months. When a business sees its profits accumulate, it can sometimes see its relationship with its lenders deteriorate. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Rosseti Volga’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals are thinking, you might find this free report on analysts’ earnings forecasts Be interesting.

Finally, a business can only pay off its debts with hard cash, not with book profits. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Rosseti Volga has created free cash flow of 20% of its EBIT, a performance without interest. For us, the conversion to cash that elicits a bit of paranoia is the ability to extinguish debt.

Our point of view

Reflecting on Rosseti Volga’s attempt to (not) increase its EBIT, we are certainly not enthusiastic. But at least it manages its debt quite well, based on its EBITDA; it’s encouraging. It should also be noted that companies in the electric utility sector like Rosseti Volga generally use debt without a problem. Overall, it seems to us that Rosseti Volga’s balance sheet is really very risky for the company. We are therefore almost as wary of this stock as a hungry kitten falls into its owner’s fish pond: once bitten, twice shy, as they say. 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. Concrete example: we have spotted 2 warning signs for Rosseti Volga you must be aware.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, then feel free to find out. our exclusive list of cash net growth stocks, today.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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