Is Atresmedia Corporación de Medios de Comunicación (BME:A3M) A Risky Investment?

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 Atresmedia Corporación de Medios de Comunicación, S.A. (BME:A3M) makes use of debt. But is this debt a concern to shareholders?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Atresmedia Corporación de Medios de Comunicación

How Much Debt Does Atresmedia Corporación de Medios de Comunicación Carry?

You can click the graphic below for the historical numbers, but it shows that Atresmedia Corporación de Medios de Comunicación had €274.2m of debt in September 2020, down from €290.1m, one year before. However, it does have €108.3m in cash offsetting this, leading to net debt of about €165.9m.

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

We can see from the most recent balance sheet that Atresmedia Corporación de Medios de Comunicación had liabilities of €413.4m falling due within a year, and liabilities of €322.2m due beyond that. On the other hand, it had cash of €108.3m and €209.5m worth of receivables due within a year. So its liabilities total €417.9m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of €692.2m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Atresmedia Corporación de Medios de Comunicación's net debt is only 1.3 times its EBITDA. And its EBIT easily covers its interest expense, being 16.0 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. In fact Atresmedia Corporación de Medios de Comunicación's saving grace is its low debt levels, because its EBIT has tanked 35% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Atresmedia Corporación de Medios de Comunicación 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Atresmedia Corporación de Medios de Comunicación recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

Based on what we've seen Atresmedia Corporación de Medios de Comunicación is not finding it easy, given its EBIT growth rate, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to to cover its interest expense with its EBIT is pretty flash. When we consider all the factors mentioned above, we do feel a bit cautious about Atresmedia Corporación de Medios de Comunicación's use of debt. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. 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. To that end, you should be aware of the 2 warning signs we've spotted with Atresmedia Corporación de Medios de Comunicación .

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.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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