Zee Media (NSE: ZEEMEDIA) seems to use debt rather sparingly
Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We notice that Zee Media Corporation Limited (NSE: ZEEMEDIA) has debt on its balance sheet. But should shareholders be worried about its use of debt?
What risk does debt entail?
Debt and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
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What is Zee Media’s debt?
You can click on the graph below for the historical figures, but it shows that in March 2021, Zee Media had a debt of 2.32 billion yen, an increase from 1.18 billion yen, on a year. But on the other hand, it also has 4.55 billion yen in cash, which leads to a net cash position of 2.23 billion yen.
Is Zee Media’s balance sheet healthy?
The latest balance sheet data shows Zee Media had 2.66 billion yen in debt due within one year, and 3.07 billion yen in debt due thereafter. In compensation for these obligations, he had cash of 4.55 billion euros as well as receivables valued at 2.38 billion euros within 12 months. It can therefore take advantage of 1.20 billion in liquid assets more than total Liabilities.
This surplus suggests that Zee Media is using debt in a way that seems both safe and conservative. Due to his strong net asset position, he should not encounter any problems with his lenders. In short, Zee Media has a net cash flow, so it’s fair to say that it doesn’t have a lot of debt!
Importantly, Zee Media has increased its EBIT by 44% over the past twelve months, and this growth will make it easier to handle its debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But you can’t look at debt in isolation; since Zee Media will need revenue to repay this debt. So if you want to know more about its profits, it may be worth checking out this chart of its long term profit trend.
Finally, a business can only pay off its debts with hard cash, not with book profits. Zee Media may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, Zee Media has generated strong free cash flow equivalent to 52% of its EBIT, roughly what we expected. This free cash flow puts the business in a good position to repay debt, if any.
While it’s always a good idea to investigate a company’s debt, in this case Zee Media has 2.23 billion yen in net cash and a decent balance sheet. And it impressed us with its 44% EBIT growth compared to last year. So is Zee Media’s debt a risk? It does not seem to us. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. To do this, you need to know the 3 warning signs we spotted with Zee Media.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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