Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Métropole Télévision S.A. (EPA:MMT) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Métropole Télévision's Debt?
As you can see below, Métropole Télévision had €52.3m of debt at June 2019, down from €146.9m a year prior. However, its balance sheet shows it holds €83.8m in cash, so it actually has €31.5m net cash.
How Healthy Is Métropole Télévision's Balance Sheet?
According to the last reported balance sheet, Métropole Télévision had liabilities of €631.5m due within 12 months, and liabilities of €166.3m due beyond 12 months. Offsetting this, it had €83.8m in cash and €335.0m in receivables that were due within 12 months. So its liabilities total €379.0m more than the combination of its cash and short-term receivables.
Since publicly traded Métropole Télévision shares are worth a total of €1.94b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Métropole Télévision boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Métropole Télévision saw its EBIT drop by 9.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Métropole Télévision's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Métropole Télévision 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, Métropole Télévision produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Although Métropole Télévision's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €32m. So we don't have any problem with Métropole Télévision's use of debt. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Métropole Télévision's dividend history, without delay!
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.
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 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. Thank you for reading.