Is ProSiebenSat.1 Media (ETR:PSM) Using Too Much Debt?

Simply Wall St
May 21, 2022
Source: Shutterstock

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies ProSiebenSat.1 Media SE (ETR:PSM) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for ProSiebenSat.1 Media

How Much Debt Does ProSiebenSat.1 Media Carry?

The image below, which you can click on for greater detail, shows that ProSiebenSat.1 Media had debt of €2.45b at the end of March 2022, a reduction from €2.59b over a year. On the flip side, it has €706.0m in cash leading to net debt of about €1.74b.

XTRA:PSM Debt to Equity History May 21st 2022

A Look At ProSiebenSat.1 Media's Liabilities

We can see from the most recent balance sheet that ProSiebenSat.1 Media had liabilities of €1.35b falling due within a year, and liabilities of €3.10b due beyond that. Offsetting this, it had €706.0m in cash and €623.0m in receivables that were due within 12 months. So it has liabilities totalling €3.13b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of €2.24b, we think shareholders really should watch ProSiebenSat.1 Media's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

We'd say that ProSiebenSat.1 Media's moderate net debt to EBITDA ratio ( being 1.9), indicates prudence when it comes to debt. And its strong interest cover of 20.4 times, makes us even more comfortable. We note that ProSiebenSat.1 Media grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ProSiebenSat.1 Media'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, ProSiebenSat.1 Media's free cash flow amounted to 50% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

While ProSiebenSat.1 Media's level of total liabilities has us nervous. For example, its interest cover and EBIT growth rate give us some confidence in its ability to manage its debt. We think that ProSiebenSat.1 Media's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for ProSiebenSat.1 Media that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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