Is Mediaset España Comunicación (BME:TL5) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Mediaset España Comunicación, S.A. (BME:TL5) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Mediaset España Comunicación

How Much Debt Does Mediaset España Comunicación Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Mediaset España Comunicación had €371.9m of debt, an increase on €226.4m, over one year. On the flip side, it has €300.0m in cash leading to net debt of about €71.9m.

How Healthy Is Mediaset España Comunicación's Balance Sheet?

According to the last reported balance sheet, Mediaset España Comunicación had liabilities of €218.7m due within 12 months, and liabilities of €435.3m due beyond 12 months. Offsetting these obligations, it had cash of €300.0m as well as receivables valued at €233.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €120.8m.

Given Mediaset España Comunicación has a market capitalization of €1.71b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Mediaset España Comunicación's net debt is only 0.31 times its EBITDA. And its EBIT easily covers its interest expense, being 96.8 times the size. So we're pretty relaxed about its super-conservative use of debt. On the other hand, Mediaset España Comunicación's EBIT dived 17%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mediaset España 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Mediaset España Comunicación recorded free cash flow worth a fulsome 84% 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

Mediaset España 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 we must concede we find its EBIT growth rate has the opposite effect. Taking all this data into account, it seems to us that Mediaset España Comunicación takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Mediaset España Comunicación's earnings per share history for free.

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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