Is Mordovia Energy Retail Company (MCX: MRSB) a risky investment?

Howard Marks put it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. We can see that Mordovia Energy Retail Company Public limited company (MCX: MRSB) uses debt in its business. But should shareholders be concerned about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. 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. When we think of a business’s use of debt, we first look at cash flow and debt together.

See our latest analysis for Mordovia Energy Retail Company

How much debt does Mordovia’s energy retail company have?

You can click on the graph below for historical figures, but it shows that Mordovia Energy Retail Company had a debt of 425.9 million yen as of December 2020, down from 501.3 million yen a year earlier. On the other hand, it has 47.4 million euros in cash, resulting in net debt of around 378.6 million euros.

MISX: MRSB Debt to Equity History May 27, 2021

A look at the liabilities of Mordovia Energy Retail Company

Zooming in on the latest balance sheet data, we can see that Mordovia Energy Retail Company had a liability of 1.18 billion yen owed within 12 months and a liability of 2.08 million yen owed beyond that. In compensation for these obligations, he had cash of 47.4 million as well as receivables valued at 774.7 million maturing within 12 months. It therefore has a liability totaling 365.0 million yen more than its combined cash and short-term receivables.

While that might sound like a lot, it’s not that big of a deal since Mordovia Energy Retail Company has a market capitalization of 628.1 million yen, and so it could likely strengthen its balance sheet by raising capital if needed. 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).

While Mordovia Energy Retail Company’s debt-to-EBITDA ratio (4.2) suggests that it is using some debt, its interest coverage is very low, at 1.1, suggesting high leverage. In large part, this is due to the company’s large depreciation and amortization charges, which arguably means that its EBITDA is a very generous measure of earnings, and its debt may be heavier than it appears. At first glance. It seems clear that the cost of borrowing money is having a negative impact on shareholder returns lately. On a lighter note, we note that Mordovia Energy Retail Company has increased its EBIT by 21% over the past year. If sustained, this growth should cause this debt to evaporate like scarce drinking water during an unusually hot summer. When analyzing debt levels, the balance sheet is the obvious place to start. But it is the earnings of Mordovia Energy Retail Company that will influence the way the balance sheet looks going in the future. So if you want to know more about its profits, it may be worth checking out this long term profit trend chart.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We must therefore clearly examine whether this EBIT leads to the 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 cash conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.

Our point of view

Based on what we have seen, Mordovia Energy Retail Company does not find it easy, given its interest coverage, but the other factors we have taken into account give us cause for optimism. In particular, we are dazzled by its conversion of EBIT into free cash flow. It should also be noted that Mordovia Energy Retail Company belongs to the electric utility sector, which is often considered quite defensive. When you consider all of the above, it seems to us that Mordovia Energy Retail Company is managing its debt quite well. That said, the load is heavy enough that we recommend that any shareholder watch it closely. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 2 warning signs for Mordovia Energy Retail Company that you need to be aware of.

If you want to invest in companies that can generate profits without the burden of debt, check out this free list of growing companies that have net cash on the balance sheet.

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About Jermaine Chase

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