We Think Atresmedia Corporación de Medios de Comunicación (BME:A3M) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Atresmedia Corporación de Medios de Comunicación, S.A. (BME:A3M) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its 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?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Atresmedia Corporación de Medios de Comunicación had €291.8m of debt, an increase on €265.7m, over one year. However, it does have €190.9m in cash offsetting this, leading to net debt of about €100.9m.

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 €421.2m due within 12 months and liabilities of €394.6m due beyond that. On the other hand, it had cash of €190.9m and €277.0m worth of receivables due within a year. So its liabilities total €347.9m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Atresmedia Corporación de Medios de Comunicación is worth €778.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

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 0.63 times its EBITDA. And its EBIT easily covers its interest expense, being 17.0 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Atresmedia Corporación de Medios de Comunicación grew its EBIT by 69% over the last twelve months, and that growth will make it easier to handle its debt. 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 the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Happily for any shareholders, Atresmedia Corporación de Medios de Comunicación actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Atresmedia Corporación de Medios de Comunicación's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But truth be told we feel its level of total liabilities does undermine this impression a bit. Zooming out, Atresmedia Corporación de Medios de Comunicación seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. 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. We've identified 2 warning signs with Atresmedia Corporación de Medios de Comunicación (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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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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.