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. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Roularta Media Group NV (EBR:ROU) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Roularta Media Group Carry?
You can click the graphic below for the historical numbers, but it shows that Roularta Media Group had €4.93m of debt in June 2019, down from €104.5m, one year before. But on the other hand it also has €90.3m in cash, leading to a €85.3m net cash position.
A Look At Roularta Media Group's Liabilities
We can see from the most recent balance sheet that Roularta Media Group had liabilities of €110.2m falling due within a year, and liabilities of €19.0m due beyond that. On the other hand, it had cash of €90.3m and €63.8m worth of receivables due within a year. So it actually has €24.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Roularta Media Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Roularta Media Group boasts net cash, so it's fair to say it does not have a heavy debt load!
Notably, Roularta Media Group made a loss at the EBIT level, last year, but improved that to positive EBIT of €7.3m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Roularta Media Group 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Roularta Media Group 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. During the last year, Roularta Media Group generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
While we empathize with investors who find debt concerning, you should keep in mind that Roularta Media Group has net cash of €85.3m, as well as more liquid assets than liabilities. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in €7.2m. So we don't think Roularta Media Group's use of debt is risky. Given Roularta Media Group has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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