We Think Atresmedia Corporación de Medios de Comunicación (BME:A3M) Can Stay On Top Of Its Debt

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.' 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. 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?

Why Does Debt Bring Risk?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Atresmedia Corporación de Medios de Comunicación

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

The chart below, which you can click on for greater detail, shows that Atresmedia Corporación de Medios de Comunicación had €278.0m in debt in December 2022; about the same as the year before. However, because it has a cash reserve of €252.2m, its net debt is less, at about €25.8m.

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 €528.6m due within 12 months and liabilities of €295.2m due beyond that. Offsetting these obligations, it had cash of €252.2m as well as receivables valued at €299.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €272.7m.

Atresmedia Corporación de Medios de Comunicación has a market capitalization of €768.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without 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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Atresmedia Corporación de Medios de Comunicación's net debt is only 0.15 times its EBITDA. And its EBIT covers its interest expense a whopping 24.8 times over. So we're pretty relaxed about its super-conservative use of debt. Fortunately, Atresmedia Corporación de Medios de Comunicación grew its EBIT by 2.7% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. 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. So we clearly need to look at whether that EBIT is leading to corresponding 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Taking all this data into account, it seems to us that Atresmedia Corporación de Medios de Comunicación takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Atresmedia Corporación de Medios de Comunicación (of which 1 shouldn't be ignored!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.