North Media (CPH:NORTHM) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 North Media A/S (CPH:NORTHM) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for North Media

How Much Debt Does North Media Carry?

As you can see below, North Media had kr.124.0m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have kr.696.2m in cash offsetting this, leading to net cash of kr.572.2m.

How Healthy Is North Media's Balance Sheet?

According to the last reported balance sheet, North Media had liabilities of kr.244.3m due within 12 months, and liabilities of kr.137.5m due beyond 12 months. Offsetting this, it had kr.696.2m in cash and kr.81.3m in receivables that were due within 12 months. So it can boast kr.395.7m more liquid assets than total liabilities.

This surplus suggests that North Media is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, North Media boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that North Media has boosted its EBIT by 66%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if North Media 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While North Media 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. Over the last three years, North Media recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that North Media has net cash of kr.572.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of kr.226m, being 90% of its EBIT. The bottom line is that we do not find North Media's debt levels at all concerning. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that North Media is showing 3 warning signs in our investment analysis , and 2 of those can't be ignored...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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