Is Zee Media (NSE:ZEEMEDIA) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk'. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Zee Media Corporation Limited (NSE:ZEEMEDIA) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Zee Media

What Is Zee Media's Debt?

You can click the graphic below for the historical numbers, but it shows that Zee Media had ₹1.00b of debt in March 2020, down from ₹1.94b, one year before. On the flip side, it has ₹940.6m in cash leading to net debt of about ₹62.3m.

How Strong Is Zee Media's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zee Media had liabilities of ₹2.06b due within 12 months and liabilities of ₹1.55b due beyond that. Offsetting this, it had ₹940.6m in cash and ₹2.00b in receivables that were due within 12 months. So its liabilities total ₹673.1m more than the combination of its cash and short-term receivables.

Zee Media has a market capitalization of ₹2.71b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Zee Media's net debt to EBITDA ratio is very low, at 0.034, suggesting the debt is only trivial. But EBIT was only 3.9 times the interest expense last year, so the borrowing is clearly weighing on the business somewhat. Shareholders should be aware that Zee Media's EBIT was down 21% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Zee Media will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, Zee Media recorded free cash flow of 23% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Zee Media's struggle to grow its EBIT had us second guessing its balance sheet strength, but the other data-points we considered were relatively redeeming. For example its net debt to EBITDA was refreshing. When we consider all the factors discussed, it seems to us that Zee Media is taking some risks with its use of debt. While that debt can boost returns, we think the company has enough leverage now. 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. Case in point: We've spotted 3 warning signs for Zee Media you should be aware of, and 1 of them is a bit unpleasant.

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.

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