Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Yandex N.V. (NASDAQ:YNDX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first step when considering a company’s debt levels is to consider its cash and debt together.
How Much Debt Does Yandex Carry?
The image below, which you can click on for greater detail, shows that Yandex had debt of ₽76.9b at the end of March 2021, a reduction from ₽86.0b over a year. However, it does have ₽231.1b in cash offsetting this, leading to net cash of ₽154.1b.
A Look At Yandex’s Liabilities
Zooming in on the latest balance sheet data, we can see that Yandex had liabilities of ₽83.9b due within 12 months and liabilities of ₽117.8b due beyond that. Offsetting this, it had ₽231.1b in cash and ₽30.0b in receivables that were due within 12 months. So it can boast ₽59.4b more liquid assets than total liabilities.
This surplus suggests that Yandex has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Yandex boasts net cash, so it’s fair to say it does not have a heavy debt load!
In fact Yandex’s saving grace is its low debt levels, because its EBIT has tanked 62% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Yandex’s ability to maintain a healthy balance sheet going forward.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Yandex 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 most recent three years, Yandex recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While it is always sensible to investigate a company’s debt, in this case Yandex has ₽154.1b in net cash and a decent-looking balance sheet. So we are not troubled with Yandex’s debt use. There’s no doubt that we learn most about debt from the balance sheet.