Reworld Media Société Anonyme (EPA:ALREW) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Reworld Media Société Anonyme (EPA:ALREW) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Reworld Media Société Anonyme

What Is Reworld Media Société Anonyme's Net Debt?

As you can see below, at the end of December 2020, Reworld Media Société Anonyme had €128.4m of debt, up from €96.0m a year ago. Click the image for more detail. On the flip side, it has €104.1m in cash leading to net debt of about €24.3m.

How Healthy Is Reworld Media Société Anonyme's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Reworld Media Société Anonyme had liabilities of €354.5m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of €104.1m as well as receivables valued at €122.4m due within 12 months. So its liabilities total €128.0m more than the combination of its cash and short-term receivables.

Reworld Media Société Anonyme has a market capitalization of €224.5m, 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.

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). 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).

With net debt sitting at just 0.59 times EBITDA, Reworld Media Société Anonyme is arguably pretty conservatively geared. And it boasts interest cover of 8.9 times, which is more than adequate. In addition to that, we're happy to report that Reworld Media Société Anonyme has boosted its EBIT by 47%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Reworld Media Société Anonyme can strengthen its balance sheet over time. 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. Looking at the most recent three years, Reworld Media Société Anonyme recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

When it comes to the balance sheet, the standout positive for Reworld Media Société Anonyme was the fact that it seems able to grow its EBIT confidently. But the other factors we noted above weren't so encouraging. For example, its conversion of EBIT to free cash flow makes us a little nervous about its debt. When we consider all the elements mentioned above, it seems to us that Reworld Media Société Anonyme is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. 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. Case in point: We've spotted 5 warning signs for Reworld Media Société Anonyme you should be aware of.

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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