The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Public Joint Stock Company Moscow City Telephone Network (MCX:MGTS) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Moscow City Telephone Network

How Much Debt Does Moscow City Telephone Network Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2019 Moscow City Telephone Network had ₽1.52b of debt, an increase on ₽489, over one year. But it also has ₽17.0b in cash to offset that, meaning it has ₽15.4b net cash.

How Healthy Is Moscow City Telephone Network's Balance Sheet?

We can see from the most recent balance sheet that Moscow City Telephone Network had liabilities of ₽35.9b falling due within a year, and liabilities of ₽20.6b due beyond that. On the other hand, it had cash of ₽17.0b and ₽7.41b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₽32.2b.

Of course, Moscow City Telephone Network has a market capitalization of ₽174.2b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Moscow City Telephone Network also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Moscow City Telephone Network has boosted its EBIT by 49%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Moscow City Telephone Network will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Moscow City Telephone Network has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Moscow City Telephone Network actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although Moscow City Telephone Network's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₽15.4b. The cherry on top was that in converted 106% of that EBIT to free cash flow, bringing in ₽10b. So is Moscow City Telephone Network's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Moscow City Telephone Network has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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