We Think Mediaset España Comunicación (BME:TL5) Can Manage Its Debt With Ease

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.' 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 note that Mediaset España Comunicación, S.A. (BME:TL5) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Mediaset España Comunicación

What Is Mediaset España Comunicación's Debt?

The image below, which you can click on for greater detail, shows that Mediaset España Comunicación had debt of €25.4m at the end of March 2022, a reduction from €371.9m over a year. However, it does have €339.1m in cash offsetting this, leading to net cash of €313.7m.

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 €238.8m falling due within a year, and liabilities of €135.6m due beyond that. Offsetting this, it had €339.1m in cash and €189.8m in receivables that were due within 12 months. So it actually has €154.5m more liquid assets than total liabilities.

This surplus suggests that Mediaset España Comunicación has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Mediaset España Comunicación has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Mediaset España Comunicación saw its EBIT drop by 3.7% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. 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. Mediaset España 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. During the last three years, Mediaset España Comunicación generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Mediaset España Comunicación has €313.7m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 91% of that EBIT to free cash flow, bringing in €226m. So we don't think Mediaset España Comunicación's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. 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 1 warning sign for Mediaset España Comunicación you should know about.

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.