Here’s Why Atresmedia Corporación de Medios de Comunicación (BME:A3M) Can Manage Its Debt Responsibly

David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Atresmedia Corporación de Medios de Comunicación, S.A. (BME:A3M) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. When we think about a company’s use of debt, we first look at cash and debt together.

See our latest analysis for Atresmedia Corporación de Medios de Comunicación

What Is Atresmedia Corporación de Medios de Comunicación’s Net Debt?

The image below, which you can click on for greater detail, shows that Atresmedia Corporación de Medios de Comunicación had debt of €287.2m at the end of September 2019, a reduction from €304.8m over a year. On the flip side, it has €90.8m in cash leading to net debt of about €196.5m.

BME:A3M Historical Debt, November 11th 2019
BME:A3M Historical Debt, November 11th 2019

A Look At Atresmedia Corporación de Medios de Comunicación’s Liabilities

Zooming in on the latest balance sheet data, we can see that Atresmedia Corporación de Medios de Comunicación had liabilities of €470.4m due within 12 months and liabilities of €360.8m due beyond that. Offsetting this, it had €90.8m in cash and €201.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €539.3m.

This deficit is considerable relative to its market capitalization of €852.5m, so it does suggest shareholders should keep an eye on Atresmedia Corporación de Medios de Comunicación’s use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Atresmedia Corporación de Medios de Comunicación has a low net debt to EBITDA ratio of only 1.1. And its EBIT easily covers its interest expense, being 17.7 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Fortunately, Atresmedia Corporación de Medios de Comunicación grew its EBIT by 7.1% in the last year, making that debt load look even more manageable. 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 Atresmedia Corporación de Medios de Comunicación’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 business needs free cash flow to pay off debt; accounting profits just don’t cut it. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Atresmedia Corporación de Medios de Comunicación recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we’d usually expect. That positions it well to pay down debt if desirable to do so.

Our View

Happily, Atresmedia Corporación de Medios de Comunicación’s impressive interest cover implies it has the upper hand on its debt. But, on a more sombre note, we are a little concerned by its level of total liabilities. Looking at all the aforementioned factors together, it strikes us that Atresmedia Corporación de Medios de Comunicación can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it’s worth keeping an eye on this one. Of course, we wouldn’t say no to the extra confidence that we’d gain if we knew that Atresmedia Corporación de Medios de Comunicación insiders have been buying shares: if you’re on the same wavelength, you can find out if insiders are buying by clicking this link.

At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.

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 editorial-team@simplywallst.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.