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

Warren Buffett famously said, '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. We can see that Atresmedia Corporación de Medios de Comunicación, S.A. (BME:A3M) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Atresmedia Corporación de Medios de Comunicación

What Is Atresmedia Corporación de Medios de Comunicación's Debt?

As you can see below, Atresmedia Corporación de Medios de Comunicación had €269.8m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds €270.4m in cash, so it actually has €593.0k net cash.

How Strong Is Atresmedia Corporación de Medios de Comunicación's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Atresmedia Corporación de Medios de Comunicación had liabilities of €431.1m due within 12 months and liabilities of €382.2m due beyond that. Offsetting these obligations, it had cash of €270.4m as well as receivables valued at €217.8m due within 12 months. So its liabilities total €325.1m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Atresmedia Corporación de Medios de Comunicación has a market capitalization of €837.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Atresmedia Corporación de Medios de Comunicación boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Atresmedia Corporación de Medios de Comunicación saw its EBIT drop by 7.4% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Atresmedia Corporación de Medios de Comunicación may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Atresmedia Corporación de Medios de Comunicación recorded free cash flow worth a fulsome 97% 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 Atresmedia Corporación de Medios de Comunicación does have more liabilities than liquid assets, it also has net cash of €593.0k. The cherry on top was that in converted 97% of that EBIT to free cash flow, bringing in €178m. So we don't have any problem with Atresmedia Corporación de Medios de Comunicación's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Atresmedia Corporación de Medios de Comunicación that you should be aware of before investing here.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.