These 4 Measures Indicate That Mediaset España Comunicación (BME:TL5) Is Using Debt Safely

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 Mediaset España Comunicación, S.A. (BME:TL5) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Mediaset España Comunicación

What Is Mediaset España Comunicación's Debt?

You can click the graphic below for the historical numbers, but it shows that Mediaset España Comunicación had €50.5m of debt in September 2021, down from €280.9m, one year before. However, its balance sheet shows it holds €253.2m in cash, so it actually has €202.7m net cash.

How Healthy Is Mediaset España Comunicación's Balance Sheet?

We can see from the most recent balance sheet that Mediaset España Comunicación had liabilities of €207.5m falling due within a year, and liabilities of €232.1m due beyond that. Offsetting these obligations, it had cash of €253.2m as well as receivables valued at €204.1m due within 12 months. So it actually has €17.7m more liquid assets than total liabilities.

This state of affairs indicates that Mediaset España Comunicación's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €1.33b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Mediaset España Comunicación boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Mediaset España Comunicación grew its EBIT at 14% over the last year, further increasing its ability to manage 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 Mediaset España 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Mediaset España Comunicación has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Mediaset España Comunicación recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Mediaset España Comunicación has €202.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of €272m, being 85% of its EBIT. So is Mediaset España Comunicación's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Mediaset España Comunicación, you may well want to click here to check an interactive graph of its earnings per share history.

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. 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.