Télévision Française 1 Société anonyme (EPA:TFI) Seems To Use Debt Quite Sensibly

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. Importantly, Télévision Française 1 Société anonyme (EPA:TFI) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Télévision Française 1 Société anonyme

What Is Télévision Française 1 Société anonyme's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Télévision Française 1 Société anonyme had €280.4m of debt, an increase on €182.8m, over one year. On the flip side, it has €209.7m in cash leading to net debt of about €70.7m.

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 €1.59b due within 12 months, and liabilities of €288.6m due beyond 12 months. On the other hand, it had cash of €209.7m and €1.03b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €642.1m.

Télévision Française 1 Société anonyme has a market capitalization of €1.42b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

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). 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).

Télévision Française 1 Société anonyme has a low net debt to EBITDA ratio of only 0.25. And its EBIT covers its interest expense a whopping 32.9 times over. So we're pretty relaxed about its super-conservative use of debt. But the bad news is that Télévision Française 1 Société anonyme has seen its EBIT plunge 17% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Télévision Française 1 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 company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Télévision Française 1 Société anonyme produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Both Télévision Française 1 Société anonyme's ability to to cover its interest expense with its EBIT and its net debt to EBITDA gave us comfort that it can handle its debt. But truth be told its EBIT growth rate had us nibbling our nails. When we consider all the factors mentioned above, we do feel a bit cautious about Télévision Française 1 Société anonyme's use of debt. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Télévision Française 1 Société anonyme you should be aware of.

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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