Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság (BUSE:MTELEKOM) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság (BUSE:MTELEKOM) makes use of debt. But the more important question is: how much risk is that debt creating?

We've discovered 1 warning sign about Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság. View them for free.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's Debt?

The image below, which you can click on for greater detail, shows that Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság had debt of Ft260.5b at the end of December 2024, a reduction from Ft321.4b over a year. However, it also had Ft70.1b in cash, and so its net debt is Ft190.4b.

How Strong Is Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's Balance Sheet?

According to the last reported balance sheet, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság had liabilities of Ft280.1b due within 12 months, and liabilities of Ft381.4b due beyond 12 months. Offsetting these obligations, it had cash of Ft70.1b as well as receivables valued at Ft228.4b due within 12 months. So its liabilities total Ft363.0b more than the combination of its cash and short-term receivables.

Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság has a market capitalization of Ft1.47t, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

View our latest analysis for Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's net debt is only 0.52 times its EBITDA. And its EBIT covers its interest expense a whopping 13.8 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. In addition to that, we're happy to report that Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság has boosted its EBIT by 51%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Our View

Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Considering this range of factors, it seems to us that Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság is quite prudent with its debt, and the risks seem well managed. So the balance sheet looks pretty healthy, to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Magyar Telekom Távközlési Nyilvánosan Müködö Részvénytársaság has 1 warning sign we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.