MTN Group (JSE:MTN) has a fairly healthy balance sheet
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. Above all, MTN Group Limited (JSE:MTN) is in debt. But the real question is whether this debt makes the business risky.
When is debt dangerous?
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. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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.
See our latest analysis for MTN Group
How much debt does the MTN group carry?
As you can see below, MTN Group had a debt of R84.8 billion in June 2022, up from R90.8 billion a year earlier. However, he also had R45.0 billion in cash, so his net debt is R39.8 billion.
A look at the liabilities of MTN Group
According to the latest published balance sheet, MTN Group had liabilities of R136.7 billion due within 12 months and liabilities of R121.9 billion due beyond 12 months. As compensation for these obligations, it had liquid assets of R45.0 billion as well as receivables valued at R33.9 billion and payable within 12 months. Thus, its liabilities total R179.8 billion more than the combination of its cash and short-term receivables.
This shortfall is sizable compared to its very large market capitalization of R250.0b, so it suggests shareholders keep an eye on MTN Group’s use of debt. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution.
In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Given its net debt to EBITDA ratio of 0.48 and interest coverage of 4.9 times, it seems to us that MTN Group is probably using debt quite sensibly. But the interest payments are certainly enough to make us think about the affordability of its debt. If MTN Group can continue to grow EBIT at last year’s rate of 16% over last year, then it will find its leverage more manageable. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine MTN Group’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a company can only repay its debts with cold hard cash, not with book profits. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, MTN Group’s free cash flow has been 48% of its EBIT, less than expected. This low cash conversion makes debt management more difficult.
Our point of view
MTN Group’s ability to manage its debt, based on its EBITDA, and its EBIT growth rate have reinforced our ability to manage its debt. That said, its level of total liabilities makes us somewhat aware of potential future risks to the balance sheet. When we consider all the factors mentioned above, we feel a bit cautious about MTN Group’s use of debt. While we understand that debt can improve returns on equity, we suggest shareholders keep a close eye on their level of debt, lest it increase. Above most other metrics, we think it’s important to track how quickly earnings per share are growing, if at all. If you’ve also achieved this achievement, you’re in luck, because today you can view this interactive chart of MTN Group’s earnings per share history for free.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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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.
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