Warren Buffett said: “Volatility is far from synonymous with risk. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We notice that Public limited company Inter RAO UES (MCX:IRAO) has debt on its balance sheet. But does this debt worry shareholders?
What risk does debt carry?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, many companies use debt to finance their growth, without any negative consequences. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
Check out our latest analysis for Inter RAO UES
What is the net debt of Inter RAO UES?
You can click on the graph below for historical figures, but it shows that in September 2021, Inter RAO UES had a debt of 16.2 billion euros, an increase from 3.18 billion euros , over one year. However, he has ₽317.1 billion in cash to offset this, resulting in a net cash of ₽300.9 billion.
A look at the responsibilities of Inter RAO UES
Zooming in on the latest balance sheet data, we can see that Inter RAO UES had liabilities of ₽156.0 billion due within 12 months and liabilities of ₽110.7 billion due beyond. On the other hand, it had cash of ₽317.1 billion and ₽103.7 billion of receivables due within one year. It can therefore boast of having 154.0 billion more liquid assets than total Passives.
This surplus strongly suggests that Inter RAO UES has a rock-solid balance sheet (and debt is nothing to worry about). Given this fact, we believe its balance sheet is as strong as an ox. In short, Inter RAO UES has a net cash position, so it’s fair to say that it doesn’t have a lot of debt!
On top of that, we are pleased to report that Inter RAO UES increased its EBIT by 44%, reducing the specter of future debt repayments. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Inter RAO UES’ ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, while the taxman may love accounting profits, lenders only accept cash. Although Inter RAO UES has net cash on its balance sheet, it is still worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it builds (or erodes) cash balance. Over the past three years, Inter RAO UES has recorded free cash flow representing 80% of its EBIT, which is higher than what we would normally expect. This positions him well to pay off debt if desired.
While we sympathize with investors who find debt a concern, you should bear in mind that Inter RAO UES has net cash of €300.9 billion, as well as more liquid assets than passive. The icing on the cake was to convert 80% of this EBIT into free cash flow, which brought in 95 billion euros. In the end, we are not worried about Inter RAO UES’ debt. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. For example, we found 3 warning signs for Inter RAO UES (1 is potentially serious!) which you should be aware of before investing here.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.