Métropole Télévision (EPA:MMT) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Métropole Télévision S.A. (EPA:MMT) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Métropole Télévision

What Is Métropole Télévision's Debt?

You can click the graphic below for the historical numbers, but it shows that Métropole Télévision had €126.9m of debt in December 2020, down from €151.1m, one year before. However, its balance sheet shows it holds €197.0m in cash, so it actually has €70.1m net cash.

How Strong Is Métropole Télévision's Balance Sheet?

According to the last reported balance sheet, Métropole Télévision had liabilities of €583.2m due within 12 months, and liabilities of €210.3m due beyond 12 months. Offsetting this, it had €197.0m in cash and €383.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €213.5m.

Given Métropole Télévision has a market capitalization of €2.33b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Métropole Télévision also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Métropole Télévision saw its EBIT drop by 4.7% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Métropole Télévision'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 Métropole Télévision 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. During the last three years, Métropole Télévision produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Métropole Télévision has €70.1m in net cash. So we don't have any problem with Métropole Télévision's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Métropole Télévision (of which 1 is a bit unpleasant!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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