Does Télévision Française 1 Société anonyme (EPA:TFI) Have A Healthy Balance Sheet?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Télévision Française 1 Société anonyme (EPA:TFI) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Télévision Française 1 Société anonyme

How Much Debt Does Télévision Française 1 Société anonyme Carry?

You can click the graphic below for the historical numbers, but it shows that Télévision Française 1 Société anonyme had €179.3m of debt in December 2020, down from €231.6m, one year before. However, it also had €178.6m in cash, and so its net debt is €700.0k.

How Healthy Is Télévision Française 1 Société anonyme's Balance Sheet?

According to the last reported balance sheet, Télévision Française 1 Société anonyme had liabilities of €1.47b due within 12 months, and liabilities of €301.7m due beyond 12 months. Offsetting these obligations, it had cash of €178.6m as well as receivables valued at €1.04b due within 12 months. So its liabilities total €551.6m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Télévision Française 1 Société anonyme has a market capitalization of €1.66b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. But either way, Télévision Française 1 Société anonyme has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With debt at a measly 0.0022 times EBITDA and EBIT covering interest a whopping 40.2 times, it's clear that Télévision Française 1 Société anonyme is not a desperate borrower. So relative to past earnings, the debt load seems trivial. The modesty of its debt load may become crucial for Télévision Française 1 Société anonyme if management cannot prevent a repeat of the 24% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Télévision Française 1 Société anonyme's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Télévision Française 1 Société anonyme generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

Based on what we've seen Télévision Française 1 Société anonyme is not finding it easy, given its EBIT growth rate, but the other factors we considered give us cause to be optimistic. In particular, we are dazzled with its interest cover. When we consider all the elements mentioned above, it seems to us that Télévision Française 1 Société anonyme is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. For example, we've discovered 3 warning signs for Télévision Française 1 Société anonyme that you should be aware of before investing here.

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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