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What Does Central European Media Enterprises Ltd.'s (NASDAQ:CETV) Balance Sheet Tell Us About It?

Simply Wall St

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Central European Media Enterprises Ltd. (NASDAQ:CETV) is a small-cap stock with a market capitalization of US$942m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Understanding the company's financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into CETV here.

CETV’s Debt (And Cash Flows)

Over the past year, CETV has reduced its debt from US$1.1b to US$719m , which also accounts for long term debt. With this debt payback, the current cash and short-term investment levels stands at US$80m to keep the business going. Additionally, CETV has generated cash from operations of US$125m over the same time period, resulting in an operating cash to total debt ratio of 17%, signalling that CETV’s current level of operating cash is not high enough to cover debt.

Can CETV meet its short-term obligations with the cash in hand?

Looking at CETV’s US$171m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$343m, leading to a 2x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Media companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NasdaqGS:CETV Historical Debt, June 4th 2019
NasdaqGS:CETV Historical Debt, June 4th 2019

Does CETV face the risk of succumbing to its debt-load?

Since total debt levels exceed equity, CETV is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if CETV’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For CETV, the ratio of 4.56x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although CETV’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how CETV has been performing in the past. You should continue to research Central European Media Enterprises to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CETV’s future growth? Take a look at our free research report of analyst consensus for CETV’s outlook.

  2. Valuation: What is CETV worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CETV is currently mispriced by the market.

  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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. Thank you for reading.