Howard Marks put it nicely when he said, instead of worrying about stock price volatility, “The possibility of permanent loss is the risk I’m worried about … and every practical investor I know takes to worry.” It is only natural to consider a company’s balance sheet when assessing how risky it is, since debt is often at play when a company breaks down. Important, MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság (BUSE: MOL) is in debt. But does this debt worry shareholders?
Why does debt pose a risk?
Debt supports a company until the company has difficulty paying it, either with new capital or with free cash flow. When things get really bad, lenders can take control of the business. However, a more common (but still expensive) situation is that a company needs to dilute shareholders on a cheap stock price just to get the debt under control. Of course, debt can be an important tool in any business, especially in capital-intensive companies. When we think about using a company’s debt, let’s first look at cash and debt together.
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How much debt does MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság have?
You can click the graph below to view the historical figures, but it shows that MOL Magyar Olajés Gázipari Nyilvánosan Muködo Részvénytársaság owed 1.05 t in March 2021, up from 1.39 t a year earlier. On the other hand, it has HUF 191.0 billion in cash, resulting in a net debt of around HUF 857.3 billion.
How strong is the record of MOL Magyar Olajés Gázipari Nyilvánosan Muködo Részvénytársaság?
The most recent balance sheet shows that MOL Magyar Olajés Gázipari Nyilvánosan Muködo Részvénytársaság had liabilities of HUF 1.54 t in one year and beyond that of HUF 1.67 t. On the other hand, it had cash in the amount of HUF 191.0 billion and HUF 689.9 billion in receivables due within one year. So it has liabilities totaling HUF 2.33 t more than its cash and short-term receivables combined.
The shortage here weighs heavily on the 1.49t Ft company itself, like a child struggling under the weight of a huge backpack full of books, sports equipment, and a trumpet. So, no doubt, we would be closely monitoring his record. After all, MOL Magyar Olajés Gázipari Nyilvánosan Muködo Részvénytársaság would likely need a major recapitalization if it had to pay its creditors today.
We measure a company’s debt burden in relation to its profitability by dividing its net debt by earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily earnings before interest and taxes (EBIT) cover its interest costs (interest coverage ). We therefore look at debt in relation to earnings, both with and without depreciation and amortization.
MOL Magyar Olajés Gázipari Nyilvánosan Muködo Részvénytársaság has a low debt to EBITDA ratio of just 1.4. Notably, despite net debt, she received more interest than she had to pay over the past twelve months. So it’s fair to say that it can handle debt like a hot teppanyaki cook can handle cooking. The low debt burden could be decisive for MOL Magyar Olajés Gázipari Nyilvánosan Muködo Részvénytársaság if management cannot prevent a repeat of the EBIT cut of 30% last year. After all, falling profits (if the trend continues) could make even modest debt quite risky. When analyzing debt levels, the obvious starting point is the balance sheet. But it is above all future earnings that will determine the ability of MOL Magyar Olajés Gázipari Nyilvánosan Muködo Részvénytársaság to keep a healthy balance in the future. So if you are focused on the future, this is what you can check out here free Analyst earnings forecast report.
But our final consideration is also important because a company cannot pay its debts with paper profits; it takes cold cash. So the logical step is to look at the portion of this EBIT that corresponds to the actual free cash flow. For the past three years, MOL Magyar Olajés Gázipari Nyilvánosan Muködo Részvénytársaság has posted free cash flow of 51% of EBIT, which is roughly normal as the free cash flow is excluding interest and taxes. This free cash flow puts the company in a good position to pay off debt if necessary.
At first glance, the level of total debt of MOL Magyar Olajés Gázipari Nyilvánosan Muködo Részvénytársaság made us hesitant about the stock, and the EBIT growth rate was no more enticing than that one empty restaurant on the busiest night of the year. But on the positive side, interest coverage is a good sign and makes us more optimistic. We are pretty sure that we classify MOL Magyar Olajés Gázipari Nyilvánosan Muködo Részvénytársaság as rather risky due to its balance sheet health. So we are almost as careful with this stock as a hungry kitten falling into its owner’s fish pond: once bitten, twice shy, as they say. Undoubtedly, we learn most about balance sheet debt. But ultimately, any business can involve off-balance sheet risks. These risks can be difficult to spot. Every company has them and we discovered them 2 warning signs for MOL Magyar Olaj- és Gázipari Nyilvánosan Muködo Részvénytársaság you should know.
Ultimately, sometimes it’s easier to focus on businesses that don’t even need debt. Readers can access a list of growth stocks with no net debt 100% free, right now.
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