Is Saratovenergo (MCX: SARE) using too much debt?
Warren Buffett said: “Volatility is far from synonymous with risk”. 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, Public limited company Saratovenergo (MCX: SARE) carries a debt. But the real question is whether this debt makes the business risky.
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. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
Discover our latest analysis for Saratovenergo
How much debt does Saratovenergo have?
The image below, which you can click for more details, shows that Saratovenergo had a debt of 1.08 billion yen at the end of June 2021, down from 1.24 billion yen year on year. And he doesn’t have a lot of cash, so his net debt is about the same.
How strong is Saratovenergo’s balance sheet?
The latest balance sheet data shows Saratovenergo had liabilities of 2.88 billion yen due within one year, and liabilities of 162.9 million yen due thereafter. In compensation for these obligations, he had cash of 1.13 million as well as receivables valued at 2.38 million due within 12 months. It therefore has liabilities totaling 664.6 million yen more than its combined cash and short-term receivables.
This is a mountain of leverage compared to its market capitalization of 802.7 million euros. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly.
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). Thus, we look at debt over earnings with and without amortization charges.
Low interest coverage of 0.20 times and an unusually high net debt to EBITDA ratio of 14.6 hit our confidence in Saratovenergo like a punch in the gut. The debt burden here is considerable. A buyout factor for Saratovenergo is that it turned last year’s EBIT loss into a gain of € 8.0 million, in the past twelve months. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since Saratovenergo will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. It is therefore important to check to what extent its earnings before interest and taxes (EBIT) are converted into actual free cash flow. Considering the past year, Saratovenergo has actually experienced a cash outflow overall. Debt is typically more expensive and almost always riskier in the hands of a business with negative free cash flow. Shareholders should hope for improvement.
Our point of view
To be frank, Saratovenergo’s net debt to EBITDA and history of hedging its interest charges with its EBIT makes us rather uncomfortable with its debt levels. But at least its EBIT growth rate isn’t that bad. It should also be noted that Saratovenergo belongs to the electric utility sector, which is often seen as quite defensive. We’re pretty clear that we consider Saratovenergo to be really quite risky, due to the health of its balance sheet. 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. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. Be aware that Saratovenergo shows 4 warning signs in our investment analysis , and 2 of them are not very good with us …
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 material. Simply Wall St does not have any position in the mentioned stocks.
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