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Here's Why News (NASDAQ:NWSA) Can Manage Its Debt Responsibly

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Simply Wall St
·4 min read
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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that News Corporation (NASDAQ:NWSA) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for News

What Is News's Net Debt?

As you can see below, News had US$1.20b of debt at September 2020, down from US$1.37b a year prior. But on the other hand it also has US$1.54b in cash, leading to a US$337.0m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At News' Liabilities

We can see from the most recent balance sheet that News had liabilities of US$2.74b falling due within a year, and liabilities of US$3.21b due beyond that. On the other hand, it had cash of US$1.54b and US$1.30b worth of receivables due within a year. So it has liabilities totalling US$3.11b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since News has a huge market capitalization of US$11.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, News boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that News has seen its EBIT plunge 10% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if News 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 News 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 three years, News produced sturdy free cash flow equating to 79% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although News's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$337.0m. And it impressed us with free cash flow of US$494m, being 79% of its EBIT. So we don't have any problem with News's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for News you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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. 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.

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